The Instability Express

Guest Post by James Howard Kunstler

The mentally-challenged kibitzers “out there” — in the hills and hollows of the commentary universe, cable news, the blogosphere, and the pathetic vestige of newspaperdom — are all jumping up and down in a rapture over cheap gasoline prices. Overlay on this picture the fairy tale of coming US energy independence, stir in the approach of winter in the North Dakota shale oil fields, put an early November polar vortex cherry on top, and you have quite a recipe for smashed expectations.

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NFTRH 317 Out Now

Actually it was out much earlier but I had to get it in the can and run this morning.

So now I am back and here to tell you that the screenshot below gives a pretty good idea of where this report is going.  It is going where it needs to go as we manage the fully expected precious metals bounce with parameters and no set in stone assumptions.  Likewise, the stock market, totally unbroken but with a lot of unhealthy signals bunching up around it.

nftrh317

Financial Sphere Bubbles

Guest Post by Doug Noland

Not an inopportune time to ponder Financial Sphere vs. Real Economy Sphere analysis.

Alan Greenspan, interviewed by the Financial Times’ Gillian Tett at the Council on Foreign Relations, October 29, 2014:

Greenspan: “One of the things that I used this book (“The Map and the Territory”) to write was to develop a concept of how do you shift from a system where everybody is acting rationally – which is what all our models basically said – to one where reality is where people are acting intuitively, various different types of forms. Irrationality is in many respects systematic – you can model it. And indeed I show in many cases why for example fear is demonstrably a much stronger force than euphoria… This is the type of thing that I think we’ve got to understand. And one of the reasons why I say, as a conclusion in this book, that the non-financial parts of our economy behave very well. They are highly capitalized, and essentially it is a financial system which is totally divorced – a different function than the type of things we do in the non-financial area. One (the financial sector) has to do with the allocation of savings into investment. That is where “animal spirits” really run wild.

I am compelled this week to return to Greenspan’s comments.  They provide a good opportunity to take a deeper dive into my favorite “Financial Sphere vs. Real Economy Sphere” analytical framework.  There’s no more important subject matter – anywhere.

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Pivotal Events

Guest Analysis by Bob Hoye

pivotal.events
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More Good News for Employment

Guest Post by Tom McClellan

UMich Sentiment versus unemployment rate
November 14, 2014

The data on the U.S. unemployment rate have been getting progressively better over recent months, either because of or in spite of the government’s efforts, depending on one’s viewpoint.  And if this week’s chart is to be believed, then the data should continue to get better over the next several months.

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Government Banks on Stocks

Guest Post by EWI

The following article was adapted with permission from the November 2014 issue of The Elliott Wave Financial Forecast, a publication from Elliott Wave International, the world’s largest market forecasting firm. Follow this link for the complete article.

Here’s a key principle concerning the role of government in bull and bear markets, as outlined in The Elliott Wave Theorist in 1991:

Government is the ultimate crowd, every decision being made by committee. It is always acting on the last trend. (For example, the Federal government passed securities laws to prevent the 1929-1932 crash…in 1934.)

The Federal government repealed that law, known as Glass-Steagall, in November 1999. [A major peak in stocks] occurred within a matter of weeks, in January 2000. Government’s effort to bring back the old bull market started in 2001 with a bailout of Argentina. Citing a critical difference from prior bull market rescue efforts, the September 2001 issue of The Elliott Wave Financial Forecast asserted that the stock market would fall straight through the effort to shore up that country. It did, as the Dow declined 30% through October 2002.

A similar short-term market plunge through a government-sponsored bailout initiative occurred on October 2. That’s when Mario Draghi, president of the European Central Bank, announced a quantitative easing program under which the central bank will buy $1.3 trillion in loans and mortgages, “including some junk-rated assets from Greece and Cyprus.”

Draghi pulled the trigger even though the Euro Stoxx 50 Index has rallied for almost three years and, at the time of the announcement, was within 5% of its June high.

In 2012, Draghi’s bold “whatever it takes” ad-lib was “seen as a masterstroke that halted the downward economic spiral that had gripped the continent.” This time he fired live rounds in the form of a long-awaited “U.S. Federal Reserve-style QE” program. But the blue chip European stock index gave him no respect; it fell. The Euro Stoxx 50 is still down 3% from its October 2 close.

The performance is similar to what happened in November 2007, when a consortium of banks organized by the U.S. Treasury created a fund (called M-Lec) to rescue the hemorrhaging market for subprime loans. At the time, The Elliott Wave Financial Forecast explained that the difference between bailouts in a healthy bull market and those in a major bear market is that in a bull market the bailouts invariably come near major lows, when the market is ready to turn up anyway. In bear markets, however, pessimism is more persistent, and the stock market ultimately falls through even the most aggressive bailout efforts.

The Elliott Wave Financial Forecast also stated that the “fascinating thing about the bailout attempt is that it was needed before the stock market even headed down. As we said in April [2007]: Chrysler and Continental Illinois were ‘too big to fail,’ the unfolding crisis will be ‘too big to bail.'”

Click here to continue reading about how the ECB’s latest scheme is already failing, and how global governments’ even more pronounced infatuation with stocks suggests an even more dramatic decline ahead >>


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Will the Dollar Bull Catch You by Surprise?

Guest Post by Capitalist Exploits

A bull market in the US Dollar is underway and its magnitude and duration are likely to catch everyone by surprise. I believe it isn’t out of the question for the USD Index to advance by at least 50% within the next 5 years. If this forecast proves correct, there will be profound ramifications for the global economy and many financial markets, particularly emerging markets.

The Dollar Index has advanced by about 10% in the last 6 months, which is quite a sizeable move. However, if one takes a long-term view this isn’t a large move. What I am interested in is the USD trading sideways for the last 7 years. Usually when a market has been locked in a trading range for a long period of time a breakout to the upside signals the start of a long-term bull trend.

Note the long-term chart of the Dollar Index below – the bull markets in the early 1980s and late 1990s occurred after long periods of sideways movements. After some 7 years of “oscillating” around the 80 level it is about due for an extended period of upward movement. This isn’t hard to work out. It is the “collateral damage” of an extended bull market in the dollar that will be difficult to estimate!

Dollar Index DXY

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Gold Sector Review

Below is a summary of some of the aspects we follow in NFTRH to gauge a future investment stance on the gold sector.  It is much more complex than simply hearing dogma that seems to make sense and then holding on for dear life…

Inflation

The hype is dying.  10 years of inflation hysterics have gone down the drain even as global policy makers pull out inflationary bazookas and use them at the slightest hint of economic trouble.  The BoJ’s recent action was just the latest and most striking in its timing.  Global markets were bouncing within correction mode and the Yen had just pinged a key resistance level.  The BoJ then blew the Yen up with policy designed to at once reward risk takers and asset holders and mercilessly punish the Japanese people, renowned for the ethic of saving.

But the global inflation is dying despite these periodic bazooka blasts.  The US Fed as much as admits it wants inflation.  More accurately, it will do anything to stave off the next deflationary impulse because when that takes hold it is going to unwind the system, and they know it.  Why on earth do you think noted Hawk James Bullard was trotted out the moment the stock market took a routine correction in October?  Here Jim, get out there and eat that mic and calm them down.

Gold is not about inflation and in this cycle it, as a squarely risk ‘OFF’ asset, is about the opposite, the deflationary unwinding of the inflated excesses which now are no longer clustered in commodities and global markets, but in US stocks and the balance sheets of certain corporations set up to benefit.

In a dis-inflationary environment, which is the preferable one for the gold stock sector, the pain comes first and the rewards for those left standing come second.  We have not exited the pain phase for gold bugs and most people still think ‘no inflation, bad for gold’ when they should be thinking ‘no inflation… that means eventual deflationary impulse… bad for the economy and stock markets and one day, from the ashes good for the gold sector when and only when gold out performs other assets positively correlated to the economy’.

tip.tlt

Goldilocks has been in play in the US as the global dis-inflationary pull has dropped the TIP-TLT ‘inflationary expectations’ gauge lower.  At some point Goldlilocks will morph to something less benign for the economy and for stock bulls.  But it has not yet.

Macro Fundamentals

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Myth #9: Inflation Makes Gold and Silver Go Up

Guest Post by EWI

Don’t Get Ruined by These 10 Popular Investment Myths (Part IX)

Interest rates, oil prices, earnings, GDP, wars, peace, terrorism, inflation, monetary policy, etc. — NONE have a reliable effect on the stock market

You may remember that after the 2008-2009 crash, many called into question traditional economic models. Why did they fail?

And more importantly, will they warn us of a new approaching doomsday, should there be one?

This series gives you a well-researched answer. Here is Part IX; come back soon for Part X.


Myth #9: Inflation makes gold and silver go up.

By Robert Prechter (excerpted from the monthly Elliott Wave Theorist; published since 1979)

This one seems like a no-brainer. The government or the central bank prints more bonds, notes and bills, and prices for things go up in response. Gold is real money, so it must fluctuate along with the inflation rate.

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