High AMO Says Rates Should Stay Low

By Tom McClellan

High AMO Says Rates Should Stay Low

AMO versus interest rates
January 20, 2017

The Atlantic Multidecadal Oscillation (AMO) is a bit of data that climate researchers use in their modeling of global climate change.  And it turns out that it has interesting messages for us about the long term trends in interest rates.

I will spare you all of the details of the AMO’s computation, but you can download the data yourself at NOAA’s web site, and read more about it at this page.

What we can see in the chart above is that there does seem to be a relationship between interest rates and global temperatures as modeled by the AMO.  The data on AMO only go back to 1856, so we cannot yet see this relationship through multiple iterations of the 60-year cycle.  To help illustrate this correlation better, I have offset the AMO data forward by 6 years.  Why there is that 6-year lag is not something I can answer.

Climate scientists have long known that there is a 60-70 year cycle in global temperatures and other related data.  And bond market analysts have long known about the 60-year cycle in interest rates.  But these two groups of experts rarely talk to each other, nor look up this period’s other usages throughout the ages.  A quick Google search shows lots of other 60-year periods of interest to people.

60-year cycles

My understanding is that the basis for the relationship between temperatures and interest rates lies in agriculture.  Warmer global temperatures are better for crop production, lengthening growing seasons and reducing drought length and severity.

Continue reading High AMO Says Rates Should Stay Low

How Was the Collective Mood as Stocks Started a 19-Year Secular Bull Run in 1982?

By Chris Ciovacco

Stocks Must Overcome 2017 Gloom

Even with the backdrop of numerous positive technical developments, it may be difficult to envision the stock market moving higher given skepticism has been lingering for several years. The tone of reporting from this week’s World Economic Forum has had a decidedly pessimistic slant. From the International Business Times:

DAVOS, Switzerland — Despite the usual trappings of revelry here in the Swiss Alps at the World Economic Forum, an unfamiliar mood grips the proceedings: gloom. World leaders and people in charge of money are nursing angst over the potentially perilous state of the global economy. They confront an overwhelming array of crises all at once — China’s economic slowdown, the collapse of energy prices, plunging stock markets, confusion over monetary policy, conflict in the Middle East, an attendant surge of refugees into Europe, and the ever-present threat of terrorist attacks.

What Can We Learn From History?

In this article, we will examine one question and one question only:

Is it possible for stocks to successfully hold a breakout from a long-term consolidation pattern when the social mood and news of the day have a pessimistic slant?

How Was The Mood Back In 1982?

If you followed the news back in 1982, it would have been difficult to imagine the S&P 500 had already started what eventually became an 18-year secular rise. As you scan the bullet points below from the Wikipedia 1982 page, try to imagine the physiological impact of weekly headlines that included wars, bankruptcies, plane crashes, high unemployment, geopolitical strife, a debt crisis, and acts of terror:

Continue reading How Was the Collective Mood as Stocks Started a 19-Year Secular Bull Run in 1982?

The “War on Cash” Has Nothing to do With Fighting Crime

By Steve Saville

Don’t be hoodwinked by the relentless propaganda into believing that the efforts being made to eliminate physical cash are motivated by a desire to reduce crime and corruption. Fighting crime/corruption is just a pretext.

The logic behind the propaganda goes like this: Criminals often use physical cash in their dealings, therefore cash should be eliminated. This makes as much sense as saying: Criminals often use cars, therefore cars should be banned. From an ethical standpoint, the fact that criminals use an item will never be a good reason to prevent law-abiding citizens from using the item.

That being said, the anti-cash propaganda is not just wrong from an ethical standpoint; it is also wrong from a utilitarian standpoint if we assume that the stated reasons (to reduce the amount of crime and strengthen the economy) are the real reasons for wanting to eliminate physical cash. This is because neither logic nor historical data provide any basis for believing that forcibly reducing the use of physical money will reduce crime or boost the economy.

With regard to the crime-fighting claim, yes, criminals often use cash due to cash transactions being untraceable, but no criminal is going to change his ways and ‘go down the straight and narrow’ in response to physical money becoming obsolete. If physical money were eliminated then genuine criminals would find some other way of doing their financial transactions. Perhaps they would start using gold, which would give governments a pretext for the banning of gold. Or perhaps they would use Bitcoin, which would give governments a pretext for the banning of Bitcoin. The point is that there will always be many media of exchange that could be used by genuine criminals to conduct their business. The banning of cash would only be a short-lived and relatively-minor inconvenience to this group.

Continue reading The “War on Cash” Has Nothing to do With Fighting Crime

How to Buy Low and Sell High Like a Pro

By Elliott Wave International

Learn about one group of investors who ACTUALLY know how to time the markets

There’s an old saying on Wall Street that goes “buy low and sell high.”

It’s usually said in jest because it’s a feat that’s much easier said than done. History shows that most investors pile into bull markets just as they are about to end, and they do the opposite in bear markets: sell right near the bottom, when the fear is at its highest.

But there is a group of professional commodity traders who consistently pull it off. They’re called “commercials.”

This is from our May 2016 Elliott Wave Theorist:

The Commodity Futures Trading Commission follows the activity of three different groups of participants in the commodity markets: small traders, large traders and commercials. Small traders are typically on the wrong side of the market at the turns. You might think that large traders, because they have a lot more money, are right a lot, but they are likewise usually wrong at the turns. The commercials are the only participants in commodity markets who generally buy low and sell high. … The reason: Commercials are in the business of manufacturing, not speculating, so they think economically rather than financially. … They perceive [commodities] as economic goods, so they search out bargains just as a consumer does in the store.

This knowledge, in conjunction with the Elliott wave model, helped us to make a key bullish gold forecast right near the end of a big sell-off. This chart and commentary are from our December 2015 Elliott Wave Financial Forecast:

“Sharp rally imminent.” Gold prices are in the late stages of an ending diagonal, which, when complete, will finish a five-wave decline from the September 2011 peak. … Large Speculators hold their smallest net-long position in 12½ years, since April 2003. Back then, gold rallied nearly 30% over the following eight months. The bottom graph on the chart shows that Commercials currently hold their smallest net-short position since the two weeks surrounding the July low, when gold started an 11% rally to October 12. Prior to that it’s been 14 years, since December 2001, that Commercials have held a smaller net-short position. As the arrows on the chart show, each of the prior instances that the Large Specs and Commercials have held similar-sized positions since gold’s September 2011 peak have led to rallies.

That forecast for a gold rally was made on the very day of gold’s Dec. 3, 2015 low of $1,046.20! Gold proceeded to rally 30% from that bottom.

Fast forward seven months: Here are a chart and commentary from our July 2016 Financial Forecast, using market data through June 30.

In December, the Financial Forecast cited a multi-year extreme in the net short position of Large Speculators and a concurrent extreme in the net long position of Commercials, and forecast the start of a rally. Gold has since gained 30%. Large Speculators and Commercials now hold a record number of futures and options contracts in the opposite direction.

That implied the end of gold’s rally. Just seven days later, on July 6, 2016, gold’s price hit a high of $1375, reversed and went on a five-month sell-off that took it to a low of $1124 an ounce in December.

Gold is just one market where we’ve kept subscribers ahead of trend changes.

Now, at the start of 2017, we’re seeing other markets — like bonds and crude oil, to name just a couple –where the activity of the “commercials” is lining up beautifully with the Elliott Wave model, implying big moves ahead.

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This is the fifth year EWI has created our annual State of the Global Markets Report. And since many markets around the world are at a critical juncture, this may be the most-timely edition of the State of the Global Markets Report yet!

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This article was syndicated by Elliott Wave International and was originally published under the headline How to “Buy Low and Sell High” Like a Pro. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.

Retailing in America: Bricks & Torture

By Danielle DiMartino Booth

For those living under Chinese rule of law and inclined to matricide, patricide or simply high treason, their luck in sentencing matters took a decided turn for the better in 1905.

It was then that after 1,000 years as part of China’s penal code, Lingchi, or Death by 1,000 Cuts, was formally outlawed by the merciful order of Shen Jiaben. Consider this method of torturRetailing in America: Brick & Torture, Danielle DiMartino Booth, Money Strong, Fed Upe that eventually, emphasize that eventuality, leads to death, to be as far as opposite as can be from a mercifully speedy beheading by razor sharp sword. The good news, for history’s more squeamish voyeurs, is that we mere mortals can only endure so much pain and terror — the 1,000 cuts was probably an egregious exaggeration. Though accounts vary, in most cases, all that was required were a few well-placed, satisfyingly deep cuts and the condemned lost consciousness, missing the worst of their own cuttingly meted misfortunes.

As with many things throughout history, it would seem that necessity is indeed the mother of invention, even in matters of torture. In the case of Lingchi, we can thank dear old Confucius and some of his closely held ideals as they related to filial piety and the form of punishment deserved, if not fully observed. If you respect mom and dad, and your elders in general, you demand of yourself the highest standards. If however, you fail these most sacred of duties, you could not reasonably expect to arrive whole, as in intact, to your spiritual life, hence Lingchi.

As for being intact, after a messy holiday shopping season, some investors have begun to question how the physical retail body will survive Jeff Bezos’ answer to Death by 1,000 Cuts. The poster child for a slow death in retailing, Sears, kicked off 2017 with the announcement that it would close an additional 150 stores, bringing to 200 the total for the current fiscal year. That’s on top of the 78 shuttered last year and the more than 200 in 2015. By April of this year, the once-quintessential retailer will have fewer than 1,500 stores left standing, down from 2011, when it had more than 3,500.

Continue reading Retailing in America: Bricks & Torture

Post-CPI

By Michael Ashton

Below is a summary of my post-CPI tweets. You can (and should!) follow me @inflation_guy or sign up for email updates to my occasional articles here. Investors with interests in this area be sure to stop by Enduring Investments. Plus…buy my book about money and inflation, published in March 2016. The title of the book is What’s Wrong with Money? The Biggest Bubble of All; order from Amazon here.

  • Last CPI of 2016…fire it up!
  • Core +0.23%, a bit higher than expected. Market was looking for 0.16% or so.
  • y/y core CPI rises to 2.21%. The core print was the second highest since last Feb.
  • For a change, the BLS has the full data files posted so brb with more analysis. Housing subcomponent jumped, looking now.
  • Just saw this. Pretty cool. Our calculator https://www.enduringinvestments.com/calculators/cpi.php … pretty cool too but not updated instantly.
    • BLS-Labor Statistics @BLS_gov: See our interactive graphics on today’s new Consumer Price Index data http://go.usa.gov/x9mMG #CPI #BLSdata #DataViz
  • As I said, housing rose to 3.04% from 2.90% y/y. Primary Rents jumped to 3.96% from 3.88%; OER 3.57% from 3.54%.
  • Household energy was also higher, so some of the housing jump was actually energy. But the rise in primary rents matters.
  • Will come back to that. Apparel y/y slipped back into deflation (dollar effect). Recreation and Education steady. “Other” up a bit.
  • In Medical Care, 4.07% vs 3.98%. That had recently retraced a bit but back on the + side. Drugs, Prof. Svcs, and Hospital Svcs all +
  • Medicinal drugs. Not a new high but maybe the retracement is done.

drugs

  • Core services up to 3.1% from 3.0%; core goods -0.6% vs -0.7%.
  • That’s consistent with our view: stronger USD will keep core goods in or near deflation but it shouldn’t get much worse.
  • The dollar is just not going to cause core deflation in the US. Import/export sector is too small.
  • Core ex-housing rose to 1.20% from 1.12%. Still not exactly alarming!
  • Not from this report, but wages are worrying people and here’s why:

atlfedwages Continue reading Post-CPI

Why Central Banks Can’t Make Inflation, and Therefore Recovery

By Jeffrey Snider of Alhambra

Inflation in China slowed somewhat in December, as the Consumer Price Index decelerated to 2.1% from 2.3% in November. Very much like in the US, Europe, and Japan, the CPI level in China continues a lengthy stretch significantly below the official monetary target. For China, the PBOC has set 3% as its definition of “price stability.” The last time inflation was at that level was for November 2013, meaning that for the next thirty-seven months the central bank has been unable to achieve its basic mandate.

The measures it has deployed to try and do so have been catalogued here in this space for some time, most recently yesterday. Given the PBOC’s balance sheet construction, it is quite clear that as far as RMB liquidity has been concerned there has been an intentional program of expansion.

As noted yesterday, this is similar in type to balance sheet expansion undertaken at other central banks, though, it should be pointed out, far less in terms of size (so far). Under announced QE’s in any of the US, Europe, or Japan, balance sheet expansion of varying sizes and durations had similarly limited effects (meaning none) on inflation. In the US, the PCE Deflator has been less than the Federal Reserve’s 2% target for a ridiculous 55 months despite a balance sheet of $4.5 trillion. The only explanations Fed officials have offered is either IOER or “transitory” effects of “other” matters, including oil prices, that are still somehow conferred that qualification as if applicable after just about five years.

From the lack of plausible account for their failure we can easily and reasonably infer unseen monetary factors (they remain unseen primarily because if they were recognized it would be a simultaneous admission of dereliction of duty). Unlike the Fed’s balance sheet, however, the PBOC’s actually displays these same factors, if only in part. In other words, the full account of China’s central bank on the asset side has been rapid expansion in RMB terms the past few years, but greater contraction in “dollar” terms coinciding and even preceding it.

Thus, what the Chinese have faced during that time is really no different than what stymied other central banks in less explicit form. They have all been overwhelmed by “dollars” that at least for the PBOC are in part included directly in the accounting for China’s functional monetary basis. The primary difference is that China’s “dollar” problems are of a more recent development, and so its increasingly more forceful response is likewise comparatively younger.

So far, however, it has achieved mostly the same results. So even if it isn’t technically balance sheet expansion or QE, that is only because the Chinese are more explicit about functional money and the overall impact of comprehensive contraction. If the Federal Reserve’s balance sheet were combined with integral parts of dollar markets, too, it might look strikingly similar.

Because of that, it is not surprising that inflation has behaved similarly in China as everywhere else QE was tried. The “dollar”, more open on that side of the Pacific, is visibly larger than the monetary policies meant to offset it. Though we can’t directly observe the dynamic in other places, that we can in China provides an explicit example of what the global economy remains up against.

Currency Chaos

By Tim Knight

This is going to be just a quick [post]. Equities are nicely in the red for a change, with the ES down 9 as I’m typing this.

0117-es

Apparently Trump’s comments that the dollar is too high has sent a bit of chaos into the world, and one dark spot for me is a very strong gold market. I’m not so sure I’m going to hold on to that DUST position anymore, but we’ll see.

0117-gc

The big surprise, just hours ago, is that Theresa May announced that for some reason the will of the British people was going to be subjected to a vote by both houses of Parliament, which might mean the entire BREXIT thing could turn out to be a non-event, thus the pound is soaring.

0117-gpb

Lastly, as mentioned, the dollar is taking it on the chin, with particular weakness vis a vis the Japanese Yen.

0117-usd

A Hint of Gold Backwardation

By Keith Weiner of Monetary Metals

We can only report that there is a change in behavior in the gold market

Last month, we noted that there could be a trend change in progress. Not only are the prices of the metals rising (which is just a mirror-image of the dollar falling, from 27.6 milligrams of gold just before Christmas to currently under 26mg). But the scarcity of gold as we measure it, using the spread between the price of gold in the spot and futures markets, has been rising.

What could cause this? One thing is for sure. It is not about the quantity of dollars. This theory is as popular as ever, despite the absolute lack of a rising gold price from September 2011-2016. The quantity of dollars has risen steadily since then.

We write much about the frequent cases when traders place big bets on something which is wrong. But the fact of their big bets drives up the price. Suppose speculators were betting on a big increase in the quantity of dollars under Trump. Then we would see a rising price alright, but we would see a rising basis—our measure of abundance of gold to the market. This cannot explain the current market either.

So what can? Recall Keith Weiner’s gold backwardation thesis. In times of stress or crisis, it is always the bid, and never the offer, which is withdrawn. Suppose the US Geological Survey were to make a dire announcement—THEY ARE NOT SAYING THIS, SO DO NOT MISCONSTRUE!! Suppose they said that there will be an earthquake in LA, an 11 on the Richter Scale. Nothing taller than a dollhouse will be left standing.

There would be no lack of offers to sell real estate. Some would hold out hope of getting “their price”. Others would generously offer to discount it 10% or 25% from the previous level.

However, what would be conspicuously absent would be a bid. Most likely from Santiago Chile to Vancouver, British Columbia and as far east as the Mississippi River. At least until the quake hit and the danger was passed.

It is gold that will withdraw its bid on the dollar. The bid sputtered 8 years ago, and intermittently since then. Then it has mostly been steady in the past few years. And now there is a hint of it, in the February gold contract. It’s just what we call temporary backwardation—a short term blip confined to the near contract that is heading into expiry.

However, we think it is notable. It means someone or many someones are switching their preference to gold, in spite of the higher yields available in the market now. Or maybe because of it. This preference, unlike speculators buying futures with leverage, is not about betting on price. It is about safety. Gold, unlike a bond, does not default.

Is this the explanation, and the whole explanation? We don’t know. We can only report that there is a change in behavior in the market. Whereas previously—this was the pattern for years—a rising price was accompanied by rising basis. And now we have rising price and the cobasis is rising instead. Rising scarcity rather than rising abundance.

To be sure, it is still a nascent trend. There is no guarantee that this won’t go poof like it has in the past. We will keep showing the data, and calling it like we see it.

Indeed, look for a new website soon. We plan to have more charts, many more, and updated daily. Including one data series that all the experts said could not be calculated.

Below, we will look at the supply and demand fundamentals for gold and silver. But first, the price action.

The Prices of Gold and Silver
gold and silver prices

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It fell a bit this week.

Continue reading A Hint of Gold Backwardation