In today's TedBits we will be outlining a lot of smoke signals. They signal fires burning and about to break out. As everyone is aware, the Federal Reserve has been tightening monetary policy for almost a year now and has been joined by the Chinese central bank. The Federal Reserve has been reducing its balance sheet expansion from $85 billion a month (85,000 million) to zero in mid-November. While the fed does not characterize it as a tightening, it is one. Numerous studies have put the amount of interest rate reduction to -3 % when QE3 was at full bore. Now that the reduction is approaching zero negative interest rates are ending, they have raised rates by about 3% in real terms. We are Austrians at TedBits and believe in all of the core truths from Ludwig Von Mises:
"There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved." - Ludwig von Mises
This is the state of the world today. The financial system and governments would collapse if credit could not expand and steal from the future. It is their lifeblood. They have created a world where they always can borrow, but have made no provision for the repayment. It is a Ponzi scheme. The math can no longer work anywhere you look. Since the math can't be made to work it is obvious that covert techniques of money printing are fully engaged and no one within the system dares yell, "Fire!" and call them out on their betrayals. Since Bretton Woods II in August 1971 when our leaders betrayed us by substituting IOUs for money, our world has become one big credit expansion, everywhere and always, REAL growth has INCREASINGLY ceased. If there wasn't lending for consumption called growth, the world's economies would rightly be called in a depression. It truly is INFLATE or DIE. Without it, our Ponzi economies and welfare states would collapse in the insolvency they inhabit. It is why our economies have become financialized to extract every penny in one way or another that they can from the public and transfer it to the government and the financial systems which control them (central banks and the their shareholders). We are debt slaves and serfs to global socialist elites, which are morally and fiscally bankrupt.
Easy money creation out of thin air has allowed politicians to cover up poor policy decisions and buy votes for decades, and the accumulated poison is now overwhelming the ability of the global economies to grow. Clearing out those DECADES of bad policies choices will be almost impossible. To do so has turned what would have been a roadside bomb of POLICY adjustment into a NUCLEAR BOMB of systemic changes. The governments that have put these anti-growth policies in place now have no memory of the policies required to create growth. Freedom and free markets, Capitalism (more for less) sound money and private property rights have all gone the way of the DODO bird: EXTINCT. Thus, the restoration of these things is INCONCEIVABLE to them. Nothing less will avoid the demise Von Mises speaks of. Debt cannot compound relentlessly without the economic growth to service it. It is called debt spirals and imminent leverage failures and it is everywhere. We will show you several today.
Janet Yellen has been on a honeymoon since becoming fed chairperson and that situation is about to change in my opinion. If you look back at the history of new fed chairmen they have always faced a challenge and Janet's challenge is coming to the plate. It will be Bigger than 2000 and 2008 I believe. Keep in mind one of Ben Bernanke's recent comments that he believes interest rates will not rise again in his lifetime. Why? You ask? Because the leverage in the system will collapse the very financial assets and governments which underpin the global financial systems. It is INFLATE or DIE and it provides the additional benefit of feeding insolvent welfare states and the socialist politicians to feed their Useful Idiot supporters. Today's missive will put some meaning into that observation.
First, let's look at some parts of the global banking systems as a percentage of GDP in their respective economies:
Notice the average in the Eurozone is a GIGANTIC 349% of GDP in 2013 (600% in the Swiss banking giants). If those assets declined in value by a mere 10% (hardly a correction), the average checks those governments would have to write is 35% of a year's GDP. Where would that money come from as these countries have surrendered the printing press to the ECB (a political exercise to gather power). Their financial systems would collapse instantly. Since those same banks also have gorged on Eurozone debt, their toxic assets would be quite a bit larger. Although, keep in mind the Eurozone has passed laws calling sovereign debt risk free so it wouldn't cause them to have to raise reserves. But the falling prices of everything outside will. In reality, I believe some of that decline has already occurred and a regulatory approved cover up is underway.
Since Bretton Wood II removed the shackles of semi-sound money redeemable in gold, growth has become a function of credit expansion as illustrated by this chart of all credit market debt from the St Louis Federal Reserve:
That brief downturn, which began in 2008, almost destroyed the global financial system, but those losses remain embedded in the system and RISKS have grown as the world has created another $30 Trillion dollars of debt according the Bank of international settlements. Yes, that is $57.5 trillion dollars ($57.5 million million) of debt (US only), spread equally among the US it is $183,300 per person. If the average interest rate on that debt is just 4% (I believe it is much higher) then the USA needs to generate $2.301 trillion just to pay the interest on it, not including principal payment. Debt creation for GDP expansion is dying as it now it prohibitively expensive and has reached the point of diminishing returns:
Now for every dollar of new debt the US gets 8 cents of GDP!
The reported GDP of the USA is now approaching $16 Trillion ($16 million million).
If you subtract phantom GDP, which is about 17% of this number you are looking at $13.3 trillion. (Phantom GDP is economic activity in which no money is exchanged, for example if you own your house free and clear but could rent it out for $2500 they call that GDP, or a free checking account which they may estimate would cost $200 dollars a year, unfunded pensions called paid wages, etc.) To service the debt using the previous calculation of interest due, that $13.3 trillion must generate 17.3% just to service the debt before any wealth can be created. That 17.3% is being paid into the financial systems (banksters) and the lenders to the government.
Next let's look at the stock market - in my opinion a levitation completely spawned by the feds balance sheet expansion, friendly HFT, leveraging corporate balance sheets with buybacks, and the plunge protection team at the Federal Reserve's headquarters on Liberty Street in New York. All working hand in hand to foster confidence in the private sector, which has not benefited from the expansion for the most part as the spoils have gone to the big banks and pension funds for the most part. Here is look from Lance Roberts and streetalklive.com:
When you subtract the balance sheet expansion from stock prices, the bull market in stocks since 2009 would DISAPPEAR! It is an illusion provided by unsound money and debasement, stocks repricing to reflect the lower purchasing power of what they are denominated in. Look at the mountain of stocks bought back at the highs with LEVERAGE:
CORPORATIONS are more LEVERAGED than EVER, foolish CEOs and bitten the poison fruit and at previous lows they will be in negative equity. Think IBM!
Earnings growth and stock markets on all time high are a MAIN STREAM MEDIA and WALL STREET MIRAGE. This leverage boosts earnings when revenues don't grow and reduces taxes as the interest is DEDUCTIBLE. FINANCIAL ENGINEERING to fool the fools among us. The stock market is out on a limb, once again of leverage. This chart from www.dshort.com lays out the tremendous amount of leverage underpinning the stock market:
Stocks are AFLOAT on a SEA of LEVERAGE never before seen in HISTORY. I thought we had the final spike high last spring, but those highs in price were confirmed by many things such as advance decline lines, rsi and other internals. The most recent highs are all with bearish divergences across the board. This next chart is Tobin's Q ratio and it is also is at all-time highs excluding the mania high tech bubble in 2000:
Notice how previous highs preceded every major crash since 1900? When speaking of PRICE to sales ratios levels are at all-time highs and nosebleed levels!
But the whole rally since 2009 has been on plummeting volume:
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The cyclical bull market since March 2009 has occurred on declining volume. In true bull markets, volume accompanies price. Since this is purely a bull market that has been financial engineered by the powers that be, price is higher and volume has crashed. This says it all. To make this DOUBLY Dangerous, HFT (high frequency trading) has become 60 to 80% of all the trading during this period. In 2008-9 it was less than 25%. Thus the REAL trading (HFT trade last seconds, not minutes, hours or days, it is a ghost of real trading and the volume is an illusion) that is occurring is probably down 80% from the highs. The HFT industry says they are bringing liquidity but during a crash and disorderly markets you can expect them to TURN OFF until orderly markets resume. They won't show up when needed... I promise!
The next chart is courtesy of Bob Hoye and his institutional advisors (I subscribe and urge you to do the same) and it is giving a Hindenburg Omen signal similar in magnitude to that last seen in March 2000.
- 50 day moving average for the NYSE must be rising.
- The number of new 52 week lows must be at least 2.2% of issues that traded and changed in value. 4.2%
- The new 52 week highs must also be at least 2.2% of issues that traded and changed in value. 8.5%
- McClellan Oscillator (NYMO) must be negative on the day. -28
Quoting Bob: "These are hard facts based what happened previously based on two and a half decades of pure Hindenburg Omen history."
- Major Crash - 27% probability. (In the last 27 years there has never been a crash without a preceding Hindenburg).
- Selling panic of at least 10-15% - 39% probability
- Sharp decline of at least 8-10% - 54% probability
- Meaningful decline of at least 5-8% - 77% probability
- Mild decline of at least 2-5% - 92% probability
- The HO signal is an outright miss - 7.7% probability (one out of 13 times)
He goes on to state that the last time he saw these levels were February 29th to March 7th, 2000. Do you remember what happened then? Are we at the next episode of credit contraction?
Now let's look at one last stock market chart that is set up at an extreme not seen since just before the CRASH of 1987:
Moral hazard is at superhuman levels courtesy of the Feds actions since 2008, levels rarely seen in history. This chart was self-explanatory, BEARISH sentiment is at multi decade lows... can you say be contrarian?
The markets are in a WOLF wave similar to the 1970s but to a much BIGGER degree (thank you Garrett Jones) and should soon plummet below the 2009 lows at it heads into the 2016 elections as the economy crumbles under the damage wrought by District of corruption in Washington and the chosen one since 2008:
US rates are the highest in the developed world by a considerable margin, take a gander at this yield chart which is now 90 days old:
Most of those countries are quite a bit lower at this time but the US is virtually unchanged, the rotation into US treasury debt is ROARING. In many EU countries 2 year yield are at ZERO while 2 years in the US yield over 50 basis points. Can you say dollar friendly? As the bond bull off the 2000 lows has exploded in supply, Dodd frank has destroyed market liquidity:
Meanwhile, Interest rates on non-government debts are TURNING higher, led by the JNK (junk). Lets look at an excerpt from the most recent Myrmikan update by Dan Oliver (I urge you to subscribe):
And the maturity wall that will have to be met into a rising interest environment courtesy of the Fed:
And let's underline it with some recent headlines/storys from www.zerohedge.com:
High-Yield Credit Crashes To 6-Month Lows As Outflows Continue
High-Yield Bonds "Extremely Overvalued" For Longest Period Ever
High Yield Credit Market Flashing Red As Outflows Surge
Author's Note: In my opinion the greatest manmade disaster and OPPORTUNITY in history is unfolding in every corner of the world. Are you diversified or operating with EYES WIDE SHUT? Are you prepared to turn it into opportunity by properly diversifying your portfolio? Adding absolute return investments which are designed with the potential to thrive (up and down markets) regardless of what unfolds economically or politically? This is what I do for investors; help them diversify into investments which are created to potentially thrive in the storm. For a personal consultation with me
CLICK HERE!
The Smart Money is getting out while the getting is good as they can read the TEA LEAVES! Would you want to be long at all-time highs heading into an ill-conceived tightening and maturity wall of that magnitude? The academics at the fed are about to learn a lesson: credit expansion IS NOT economic growth. Look no further that the aforementioned ETF of the JNK bonds, the duration mismatch of daily liquidity combined with the illiquidity of the bonds themselves at trading desks will be a debacle in my opinion. ETFs in general suffer from this malady and could be a big catalyst for market crashes when liquidity disappears but RETAIL sellers are anxious to exit! That is a prediction.
Now let's look at a MONTHLY Continues commodity index chart and what these issues are doing there going back to January 2004:
THIS IS A BIG CHALLENGE! Look at that HUGE Head and Shoulder top: under construction for 8 years!!!! And it became active THIS MONTH. Falling through the right shoulder and support is a BIG DEAL and signals DEFLATION. Those are 5 year lows with momentum, which does not symbolize a recovery in the GLOBAL economy, in fact just the OPPOSITE. This is not a chart signaling economic growth and recovery, it is just the opposite. Look when the deflation began again: when they started the TAPER! The rising trend line is the trend line since the 2000-2002 lows, so the secular bull is alive but the cyclical bear is going to put it to the test. If Yellen allows the rising trend line to be punctured, things could get out of hand very quickly!
To affirm this picture look no further than the US dollar since 2004, a huge MULTI YEAR bottom looks to be in place in my opinion:
The dollar is on a monthly buy signal and based on the chart should RUMBLE HIGHER! This is a picture of an unfolding disaster for the world economies; it is a freight train full of looming disasters pulling out of the station with lots of momentum yet to emerge. Every bit of debt issued outside the US, which is dollar denominated, is BECOMING a lot less SERVICABLE as the debtors must convert their local currencies into dollars to make payments to lenders. The higher it goes, the more they must pay! Dollar denominated debt is actually a short position equal to the size of the borrowing. An example is the Ukraine whose debt is over a quarter of a trillion dollars and whose currency is off 50% since January, thus their external debt in local currency terms is up 50% to $375 billion. Or Russia, with $650 billion in external debt and their currency is off 30% pushing their obligation near a trillion. Would you rather be the lender or the borrower? The lender is holding the bag, think banking systems and fools who believe bombs are RISK free. They are not risk free in a debt spiral world with no growth.
As the next phase of the crisis unfolds, and Yellen tightens (rush for yield in a yield less world) investor's worldwide will behave like Pavlov's dog and rush to the dollar for safety. This rush has already begun. With the dollar rallying those metrics is NOW playing itself out around the world. The principle export of the US for DECADES is and has been DOLLARS and many of the people off shore are short of them because of dollar denominated DEBT. That is why many markets crash when the dollar rises. They must liquidate other investments to SERVICE the debt, a margin call to levered economies. They are in a huge short squeeze globally. A rising dollar is ECONOMIC and FISCAL poison to a dollar debt denominated world. Can you hear the printing presses?
In closing: It's still Inflate or Die and it is now more imperative than ever. Everything is set to trigger a number of concurrent setbacks for investors caught in the matrix of misinformation and the mainstream media. I have been looking for the CREDIT expansion since 2009 to end this year as I have outlined since January when the taper really started to BITE. The FED can never remove the liquidity, ever. The ability to do so ended in 2008 when interest rates went to ZERO, the financial system died (now on life support known as QE) and have remained there. Tops are a process and look to be completing now as you can see. My latest missive on Bombs er bonds, debacle on the doorstep was done in May. The fed and Chinese tightening will not be a ENGINEERED soft landing it is hoped it will be, I believe an economic and market crash is imminent. The Alibaba IPO was a bell ringer for stocks; a close look at the corporate structures, and valuations spells recklessness rarely seen, and let's put a few cherries on top as the Russell 2000 just had a death cross and approximately 40% of all Nasdaq stocks are in bear markets. DING DING DING!
I have said many times that they can never end QE as it covers the negative cash flows of so many including Insolvent governments and have done a lot to move toxic assets to central bank balance sheets where they can die a quiet death. The fingerprints of the next contraction in the credit and global economic crash are all front and center. I have not touched on Europe but the TRAGEDY is in full bloom from Italy to France and many places in between.
The next crisis is clearly in front of us and it is much larger than the 2008 version. The elites have only expanded the economy by issuing DEBT; remember the boom brought on by credit expansion. Yellen will fail her tapering and ignite the next leg down in global economies; the markets are telling us so in macro! The world is at the edge of a knife and the tightening and dollar bottom is the trigger for the next contraction. Stock and bombs er bonds are on their highs, gold is on its lows, and reversals are at hand in my opinion.
The policies to revive the economy are inconceivable to those who control the World's economies as they are socialists. Capitalism, free markets and sound money (which they don't know the meaning of) is the boogeyman to be stopped at all costs. That is what their policies are designed to do, killing all three. It is the only solution to the world's problems, and the politicians are killing it. Those policies of PRIVATE sector growth where implemented by their grandfathers and they missed the history lessons. As I outlined in my last series Useful Idiots and the Something for Nothing Society, this is a societal suicide that all empires have gone through and there is no way to dodge the bullet as it is sociopaths and psychopaths leading us to our doom. The system is now made to create failure and create money out of thin air to cover it up. This will end. It is the greatest opportunity in the world as the greatest transfer of wealth in history looms from those that hold it in paper to those that don't. Von Mises quote looms dead ahead. May God Bless you all.
Author's Note: In my opinion the greatest manmade disaster and OPPORTUNITY in history is unfolding in every corner of the world. Are you diversified or operating with EYES WIDE SHUT? Are you prepared to turn it into opportunity by properly diversifying your portfolio? Adding absolute return investments which are designed with the potential to thrive (up and down markets) regardless of what unfolds economically or politically? This is what I do for investors; help them diversify into investments which are created to potentially thrive in the storm. For a personal consultation with me CLICK HERE!
Don't miss the next issue of TedBits, the economic and financial no spin zone and our weekly wraps on breaking events through the Austrian lens: subscriptions are free at CLICK HERE. Or check out our new blog at www.TedBits.com it has thousands of the hottest posts on the net.
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Since early 2013 the US stock markets have done nothing but rally, levitating thanks to the Feds oft-implied backstop.This incredibly unnatural behavior has left sentiment dangerously unbalanced, with hyper-complacency and euphoria running rampant.Only a major selloff can restore normal psychology.And with the Feds third quantitative-easing campaign ending, odds are high such a big downside event looms.
Stock markets are forever cyclical.Stock prices dont move in straight lines forever, they endlessly rise and fall.Great cyclical bulls that earn investors fortunes are followed by brutal cyclical bears that create the best opportunities to buy low again.The perpetual cyclicality of the stock markets reminds me of Mark Twains famous weather quip.If you dont like current stock prices, just wait a spell and theyll change!
The rising and falling of stock markets is fractal in nature, repeating at different scales.There are great 17-year secular bulls and bears driven by valuations, the markets overarching cycles.Within them are still-large cyclical bulls and bears, generally lasting from 2 to 5 years each.And then in turn these are punctuated by smaller countertrend moves, corrections inside cyclical bulls and bear-market rallies in bears.
These mid-cyclical-bull selloffs are exceedingly important for the bulls health.When stock prices rise, the great sentiment pendulum swings ever farther towards the greed extreme of its arc.If the excessive optimism that rising stocks always create grows too unbalanced, all near-future buying is sucked in.So the stock rally soon burns itself out, leaving nothing but sellers.This dynamic is what breeds stock selloffs.
The serious risk today is that these selloffs tend to be proportional to the rallies that led into them.The longer stock markets climb without a major selloff to rebalance sentiment, the more unbalanced trader psychology becomes to the greed side.This necessitates commensurately larger and/or sharper selloffs to bleed off the excess euphoria and bring sentiment back into line.That means we are in for a doozy of one today!
For the better part of two years now, the American Federal Reserve has tirelessly worked to short-circuit every nascent stock-market selloff.Both by actively creating new dollars out of thin air to monetize debt, and by incessantly jawboning about further easing, the Fed convinced stock traders that it would be quick to respond to any stock-market weakness.So they bought and bought, nipping every selloff in the bud.
But with no real selloffs, sentiment couldnt be rebalanced.Thus greed, euphoria, complacency, and even hubris flourished immensely.This pulled vast amounts of buying forward, effectively bullying far more investors into buying stocks than wouldve otherwise done so in normal markets.This so-called Fed Put led to the most distorted, overvalued, overextended, and risky markets weve seen since the early-2000 bubble.
The Feds insanely-reckless actions merely delayed the inevitable selloff, and ensured it is going to be a heck of a lot larger than normal.This reminds me of wildfire suppression.The more often firefighters rush to extinguish little fires, the thicker underbrush grows.All that fuel is a time bomb, just waiting for the right conditions and spark.The resulting massive and terrible conflagration finally rebalances the system.
To illustrate just how choked up with tinder-dry greed todays Fed-distorted stock markets are, I built a couple charts.They superimpose the flagship SPDR S&P 500 ETF (SPY) over the famous VIX implied-volatility fear gauge.Since the Federal Reserve had never done anything remotely like the open-ended QE3 bond monetizations in its entire century-long history, no one has ever witnessed markets like these before.
The Feds totally unprecedented third quantitative-easing campaign was hatched back in September 2012, and then more than doubled a few months later in December.Thats when stock traders started to believe the Fed would swiftly arrest any material stock-market selloff, thus the levitation was born.Ever since then, stocks have essentially done nothing but rise.All selloffs were stunted before they could mature.
Stock-market selloffs are categorized by size.Anything under 4% on the benchmark S&P 500 (SPX) is nothing but noise, it doesnt even qualify for a formal label.Such trivial selloffs naturally do nothing at all to eradicate excessive greed, so they are usually ignored.But thanks to the Feds implied backstop on stock markets, theyve dominated its QE3 levitation.The larger ones are noted in this chart in green.
Once a selloff gets over 4%, its classified as a formal pullback.Selloffs of this magnitude start to demand traders attention, sending cracks cascading through the universal greed that arises when stocks grow too overbought.In normal healthy bull markets, pullback-magnitude selloffs are seen several times a year or so.But thanks to the Fed, weve only seen 4 in this levitation that were oddly clustered in its middle.
Pullbacks certainly arent major selloffs, that designation only comes after 10% when downside moves become actual corrections.These do the most work in rebalancing sentiment by far, greatly reducing greed and ramping fear by their ends.Like underbrush getting burned out, that leaves bull markets in a healthy state psychologically ready to be bid higher again.Corrections happen once a year or so on average.
But in the 22.1 months between SPYs November-2012 bottom and its latest high last week, this mighty S&P 500 ETF has soared 48.7% higher without a single correction-magnitude selloff!With the Fed Put in force, the markets didnt even get close to 10%.Their largest pullback was merely 6.0% over a month or so in June 2013 when Ben Bernanke initially outlined the Feds best-case timeline for tapering QE3.
Nearly two years without a real correction to rebalance sentiment in a powerful bull is an extraordinary span of time.To the best of my knowledge, comparable episodes have only been seen historically in rare times when major bull markets are topping.So much greed and euphoria are generated during a long, low-volatility, correction-less span that future stock buying is universally pulled forward killing the bull.
Its been so long since the last correction that most epically-complacent stock traders have likely forgotten just how nasty and dangerous they are.On the right side of this chart, I noted the SPY levels necessary for 5%, 10%, 15%, and 20% selloffs from its recent peak.Merely falling 10%, a baby correction, would leave SPY near $182.That would take it back to late-2013 levels, totally erasing this entire years gains!
But like those wildfires, the longer without a correction the more greed underbrush grows so the bigger the selloff when it eventually arrives.So the odds are very high that the coming major selloff will stretch far beyond 10%, up into the 15% or even 20% range of full-blown corrections.At 15%, SPY would drop near $172 taking it back to levels first seen over a year ago.Imagine the dire psychological impact of that.
Technically once a selloff hits 20%, it formally becomes a bear market.But major corrections often edge right up to this 20% to maximize their greed destruction and fear generation.Since its easier to think in terms of 20% instead of the high 19s, a serious correction would hammer SPY all the way back down near $161.These levels were first seen in the spring of 2013, so that would erase most of the Feds levitation!
Major corrections are certainly not trivial events that should be haughtily dismissed.They wipe out a fifth of the capital in the entire stock markets, with the higher-flying stocks popular among traders suffering far worse declines!And with each passing day since the end of the last correction, the higher the odds grow that the next one is imminent.The sentiment pendulum cant swing into greed territory forever.
Greed and fear are of course ethereal, they cant be directly measured.But overall market psychology can be inferred through a wide variety of indicators.The premier one is the VIX implied-volatility index.It measures speculators collective bets on S&P 500 index options over the coming month.The wider the range of bets in price terms, the greater the volatility expected.And high volatility equates to fear.
Provocatively the three biggest pullbacks of the Feds SPX levitation saw the VIX spike above 20.So even if youve drank the bulls Kool-Aid and believe a major selloff isnt necessary, not even a meaningful pullback is likely to end until the VIX catapults above 20 again.That means this past weeks selloff, even if the Feds stock-market levitation magically continues, still hasnt generated enough fear yet.
As a contrarian investor, Ive grown rich betting against popular consensus.Thats the only way to buy low and sell high consistently.So I continue to strongly believe that this Fed-driven anomaly in the stock markets is so extreme fundamentally, technically, and sentimentally that only a new cyclical bear can restore normal balance on those fronts.Remember stock markets are forever cyclical, bears always follow bulls.
This next chart zooms out to encompass the entire cyclical bull since March 2009, most of which was totally righteous.The extreme Fed distortions didnt come until early 2013, late in this bulls life.I was super-bullish publicly on the record in March 2009 at this bulls birth, and then again in July 2010 and in October 2011 when stock markets were bottoming after major corrections.Contrarians buy low during fear.
Normal cyclical bull markets start off with rocket-like ascents out of the extreme fear pervasive at the ends of cyclical bears.But then their trajectories slowly taper off into the horizontal parabola rendered above in yellow.Everything was again normal until early 2013, when the Fed started jawboning about not letting the stock markets sell off.The resulting SPX levitations decoupling is crystal-clear in this chart.
The first four years of this bull saw normal and healthy corrections periodically to rebalance sentiment.The first one started 13.5 months into this bull, and the second began 9.9 months after the first one ended.They were major full-blown selloffs at 16.1% in SPY terms over 2.3 months in mid-2010, and a near-the-limit 19.4% over 5.2 months in mid-2011.These corrections kept this bull healthy, bleeding off excess greed.
But since the end of that last correction in early October 2011, it has been a jaw-dropping 35.5 months!Thats an astounding three years without sentiment being rebalanced, without the greed-drenched underbrush being burned away!The amount of complacency, greed, euphoria, and hubris that can grow in such a long, unchecked span of rapidly rallying stocks is epic.It is going to fuel a massive selloff.
Even if youre one of the legions of optimists somehow betting this cyclical bull has years left to run yet, a long-overdue 20% correction will erase most of the Feds levitation.If thats all we are in for and this geriatric bull still has legs, the all-clear signal will be a gigantic VIX spike higher.This definitive fear gauge had to rocket above 45 before each of this bulls last two corrections ended.We are nowhere close yet.
But the case for a new cyclical bear is far stronger, nearly ironclad after such an outsized bull.This one has seen SPY nearly triple with a staggering 196.3% gain over 66.4 months.This is far beyond the average size and duration of mid-secular-bear cyclical bulls of a doubling in 34.8 months.Stock bulls simply dont power higher forever, and thanks to the Fed this ones magnitude and age are truly extreme.
So much rallying for so long has naturally left stock-market valuations extreme too.Todays stock prices are simply far too high relative to their underlying earnings by all historic standards.As of the end of last month, the trailing-twelve-month price-to-earnings ratios of all S&P 500 stocks averaged a breathtaking 26.0x!This isnt far from 28x bubble territory, and nearly twice the century-plus 14x fair-value standard.
And in addition to extreme technicals and fundamentals, sentiment is also extreme.Back in early July, the VIX fell to 10.3.It hadnt been so low since February 2007, heading into the top of the last cyclical bull in October 2007 before the S&P 500 rolled over into a brutal cyclical bear where it ultimately lost 56.8%!But ominously todays Fed-manipulated sentiment is even more complacent than back then!
The original old-school VIX which only applied to the top fifth of SPX stocks, the S&P 100, now trades as VXO.It remains a superior fear gauge, as it only looks at at-the-money options of the elite S&P 100 instead of the new VIXs broader range for the entire S&P 500. During major selloffs, the biggest and best SPX stocks are sold fastest since they have the most liquidity and trading volume to absorb the selling.
In early July 2014, that classic old-school VIX now known as the VXO fell to a mindboggling 8.5.This was its lowest level ever seen, an all-time record!Thats saying a lot for an index thats been calculated back to January 1986, that saw the extreme complacency before the infamous 1987 stock-market crash and during the early-2000 bubble.Fear at an all-time low measured by the VXO is as extreme as you can get!
So with the Feds totally artificial levitation forcing the US stock markets technicals, fundamentals, and sentiment to crazy extremes, its hard not to imagine a new cyclical bear looming.And the losses that would entail ought to terrify todays hyper-complacent investors.Cyclical bears tend to cut the stock markets in half!50% losses are devastating beyond belief for investors, especially older ones nearing retirement.
I marked bear-magnitude losses on the chart above.At 30%, SPY would fall near $141.That would take it back to early-2012 levels erasing about half of this entire bulls gains.At 40%, SPY would drop near $121 which was first seen way back in mid-2010.And at a full-blown 50% cyclical bear, SPY would ultimately bottom near $101 which would slash it to mid-2009 levels eradicating nearly this entire bulls gains!
Can you stomach that kind of risk today?Best case even if this bull magically continues for years to come as Wall Street is trying to dupe investors into believing, we are in for a massive correction nearing 20% to rebalance sentiment.Worst case, we are looking at a new cyclical bear that is likely to cut stock prices in half over a couple years.With very-high odds for a major selloff, why take the risk of sitting in lofty stocks?
And greatly amplifying this already-suffocating downside risk, the perfect catalyst for a major selloff is here.At last weeks FOMC meeting, the Fed declared in its statement that the Committee will end its current program of asset purchases at its next meeting.That means QE3, the inflationary debt-monetization campaign that levitated the stock markets for nearly two years, is scheduled to end on October 29th!
Just a month from now the QE new-buying era ends, leaving the Fed bereft of the ability to convince traders it is backstopping stock markets.Harsh political realities make launching QE4 risky to the Feds very existence.The imminent end of QE3 is the best catalyst weve seen for sparking a major correction or new bear market since QE3 was launched.The precedent on this is crystal-clear, the ends of both QE1 and QE2.
The first major correction of this cyclical bull in mid-2010 was triggered when QE1s buying was ending.And the next major correction in mid-2011 erupted when QE2s buying was ending.These once again were not trivial selloffs, with SPY plunging 16.1% and 19.4%.And the stock markets then were far less risky, overextended, overvalued, and complacent than they are today.QE3s impending end is truly ominous.
So what should prudent investors do?Sell dangerously-overvalued stocks high and buy dirt-cheap gold low.While stocks are adored thanks to the Fed, gold is loathed.Its price is due to mean revert radically higher as the artificially-levitated stock markets roll over.Gold is a proven performer during stock bears, having rallied nicely during the last two since 2000.Alternative investments shine when stocks are weak.
You also need to cultivate an essential contrarian perspective on the markets.Cyclical bears unfold gradually over a couple years or so, and Wall Street wont admit we are in one until it is almost over and catastrophic losses have already been suffered.The only way to protect yourself and your precious capital from Wall Street groupthink is to learn to fight the herd to buy low and sell high like a contrarian.
Thats what we do at Zeal.Weve spent decades intensely studying and trading the markets so you dont have to.We publish acclaimed weekly and monthly newsletters that draw on our hard-won experience, knowledge, wisdom, and ongoing research to explain whats happening in the markets, why, and how to trade them with specific stocks.Since 2001, all 686 newsletter stock trades have averaged stellar annualized realized gains of +22.6%!Subscribe today before the markets reverse!
The bottom line is stock markets rise and fall.And thanks to the Feds gross distortions of psychology, todays are overextended, overvalued, and epically complacent.That means a major selloff is long overdue to rebalance sentiment.Best case if the bulls are right, it will be a major correction approaching 20% like at the ends of QE1 and QE2.But far more likely is a new cyclical bear ultimately cutting stocks in half.
Naive investors trapped largely unaware in it will suffer catastrophic losses most wont have time to recover from.But the smart ones will prudently sell high while this long-in-the-tooth stock bull is still topping.Then they can grow their capital through alternative investments while this looming bear runs its course.They will be perfectly positioned to buy low as it ends, and multiply their fortunes in the next bull.
Adam Hamilton, CPA
September 26, 2014
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Adam Hamilton
Adam Hamilton
This week saw gold rally $15 to $1233 on Tuesday before sliding to $1207 yesterday morning, then rallying in the afternoon. Silver's moves tracked gold's, bottoming out at $17.30 yesterday at the London opening. This morning precious metals are firmer in pre-LBMA trade, reflecting some short-covering ahead of the weekend.
The action, as has often been the case recently, is in paper markets with hedge funds shorting gold and silver against a strong dollar. This can be readily seen in the following chart of Managed Money shorts on Comex, which is back in record oversold territory. The chart of silver is similar.
The analysts encouraging fund managers to sell gold are mostly working for the investment and bullion banks, and it turns out that their traders are buying it, closing their bear positions. This is shown in the next chart of Swaps, which represents mostly the aggregate futures positions of the non-American bullion banks.
So the swaps have reduced their net shorts by over 60,000 contracts (190 tonnes) over the last five weeks. The next chart is of the largest four traders, which are mainly the American bullion banks.
Here again, over the last five weeks they have bought back about 200 tonnes, which added to the swaps makes nearly 400 tonnes, bought over the last month-and-a-bit by banks whose analysts are mostly encouraging the public to sell. As they say, go figure.
This does not mean that gold and silver won't go lower next week: we will only know that with hindsight. But it is going to get more difficult for the bullion banks to close their shorts from here for the following reasons: the weak hands have now mostly sold, and there is increasing evidence (mostly anecdotal admittedly) of growing physical demand for delivery. This varies from wealthy investors taking a long-term view, to the pre-Diwali season stock-building reflected in centres such as Dubai, as well as the usual suspects such as the Chinese and Russians. In fact this morning the Shanghai Gold Exchange reported deliveries rose to over 50 tonnes in the week to 19th September. This is the highest weekly delivery since February, and at current prices SGE demand could turn out to be even higher this week.
A brief mention on silver: between Thursday 18th and yesterday, the equivalent of 48,265,000 ounces were swapped for 9,630 Comex December contracts (Exchange for Physical, or EFP). On Tuesday the volume of futures and options was exceptionally high, Open Interest fell 5,501 contracts, and 2,489 contracts were exchanged for physical. Could it be that this silver was required to be delivered to other markets, such as Shanghai, where stocks are depleted and silver is trading at a price premium?
Could it be that the acceleration of demand for silver eagles is indicative of the demand for physical silver at these low prices? If so, it is an indication that Comex is pricing silver futures too low to reflect genuine demand, and the price will struggle to go lower.
Next week
Monday.
UK: BoE Mortgage Approvals, Net Consumer Credit, Secured Lending, M4 Money Supply.
Eurozone: Business Climate Index, Economic Sentiment, Industrial Sentiment, Consumer Sentiment.
US: Core PCE Price Index, personal Income, Personal Spending.
Japan: Real Household Spending, Unemployment, Industrial Production, Retail Sales.
Tuesday.
Japan: Housing Starts, Construction Orders, Tankan Survey.
UK: Nationwide House Prices, Current Account, GDP (3rd est.), Index of Services.
Eurozone: Flash HICP, Unemployment.
US: Case-Shiller Home Price, Chicago PMI.
Wednesday.
Japan: Vehicle Sales. Eurozone: Manufacturing PMI.
US: Manufacturing PMI, ADP Employment Survey, Construction Spending, ISM Manufacturing, Vehicle Sales.
Thursday.
Eurozone: PPI, ECB Deposit Rate, Refinancing Rate.
US: Initial Claims, Factory orders.
Friday.
Eurozone: Services PMI, Composite PMI, Retail Trade.
US: Non-Farm Payrolls, Private Payrolls, Trade Balance, Unemployment.
onspiracy fact: The European Central Bank Gold Agreement is renewed
Bullion Vault research director Adrian Ash notes that the fourth European Central Bank Gold Agreement takes effect today, extends for five years, and removes any limits on gold sales by the 21 signatories while acknowledging that "they do not have any plans to sell significant amounts of gold," because the limits contained in predecessor agreements had come to look silly, such sales having ended long ago. Ash's commentary is headlined "End of the Central Bank Gold Agreement" and it is posted at Bullion Vault here --
https://www.bullionvault.com/gold-news/centra...-gold-092620143
-- but from GATA's perspective the agreement's latest incarnation, announced in May, remains significant for two other reasons.
That is, the agreement, posted at the European Central Bank's Internet site here --
http://www.ecb.europa.eu/press/pr/date/2014/h...r140519.en.html
-- renews the proclamation of conspiracy that Western financial news organizations and most purported gold market analysts refuse to see.
"The signatories," the renewed agreement says, "will continue to coordinate their gold transactions so as to avoid market disturbances."
That is, first, the participating central banks will continue to meet secretly to consider manipulating the gold market, which is disguised as a matter of avoiding market disturbances -- or at least avoiding disturbances the central banks don't like. Financial journalists and market analysts will not be invited to these meetings, nor will any mere member of the public be allowed to attend -- not even CPM Group's Jeff Christian or Doug Casey of Casey Research, who purport to know everything central banks do in regard to gold.
And second, the U.S. Federal Reserve and the U.S. Treasury Department continue not to be signatories to the agreement and thus do not even pretend to want to avoid disturbing the gold market.
The latest European Central Bank Gold Agreement is not "conspiracy theory" but conspiracy fact, not so much hiding in plain sight as residing in the open with the participants having full confidence that financial news organizations and purported market analysts will never dare to explore what it really means, the first rule of mainstream financial journalism being that no critical questions about gold may ever be put to a central bank and that a central bank's refusal to answer critical questions about gold may never be reported.
Stocks bounced back today, for no particular reason really.
The third GDP revision was unchanged, and Sentiment was in line to a little low.
This is an artificial market. And the real buy and sell volumes, ex speculative poofery, are low.
The good news I suppose for Wall Street is that prices are therefore fairly easy to push around using leveraged instruments like the SP futures.
The bad news is that if we see a certain type and level of exogenous event, there will not be much to hold prices up once the day trading dip buyers run to the sidelines. And without human market makers managing the flow, the downdraft could be fairly impressive.
But timing something like this is almost impossible. This is more an occasion of knowing the types of trails which we are skiing, and not necessarily where and when there could be a specific instance of danger.
Have a pleasant weekend.