The Daily Shot

By SoberLook

We begin with the global commodity markets.

1. Metals & mining shares have bounced sharply, outperforming the S&P500 by 43% in 2016.


A key driver of this outperformance by the mining firms is the recent rally in iron ore, with the futures in Singapore rising by over 5% on Monday. Vale, a major mining company, seems to be quite bullish iron ore.

Source: barchart

Source: The Australian

2. Steel futures in Shanghai were up 3.5% on Monday, with price increases accelerating.

Source: barchart

As discussed before, part of this rally is driven by a more forceful fiscal stimulus package from Beijing as investment projects in China pick up pace.

Source: @Callum_Thomas, LSR

Rising prices of steel and several other products have now made their way into China’s PPI, which rose (month-over-month) for the first time in years. The end of the wholesale deflation in China was also visible in increasing output prices in the PMI reports.

Source:  ‏@TomOrlik

Source:  ‏@TomOrlik

3. Another commodity that has been on the rise in China is pork.


Source: ‏@pdacosta 

Higher pork prices have kept the food CPI as well as the headline CPI in China (relatively) elevated.

Source: @Sentifi_HK

4. The next chart shows gold mining shares vs. gold over the past year.

Continue reading at TalkMarkets →

The True Meaning of Gold’s CoT Data

By Steve Saville

This post is a slightly-modified excerpt from a recent TSI commentary.

The COT (Commitments of Traders) data for gold is portrayed by some commentators as an us-versus-them battle, with “them” (the bad guys) being the Commercials. Whether this is done out of ignorance or because it makes a good story that attracts readers/subscribers, it paints an inaccurate picture.

As I’ve explained in numerous TSI commentaries over the years, the Commercial position is effectively just the mathematical offset of the Speculative position. Speculators, as a group, cannot go net-long by X contracts unless Commercials, as a group, go net-short by X contracts. Furthermore, we can be sure that Speculators are the drivers of the process because most of the time the Speculative net-long position moves in the same direction as the price.

Continue reading The True Meaning of Gold’s CoT Data

Precious Metals Conspiracy

By Monetary Metals

For at least a few weeks now, we have noticed a growing drumbeat from a growing corps of analysts. Gold is going to thousands of dollars. And silver is going to outperform. Reasons given are myriad. Goldman Sachs apparently said to short gold, so if one assumes that the bank always advises clients to take the other side of its trades—a tricky and dangerous assumption at best—then one should buy gold. Then there’s the change in ETFs, for example the Sprott Physical Silver Fund has had inflows and Sprott bought more silver. And there’s currency wars, money printing, negative interest rates, etc.

Most of these stories are based in fact (well except the belief that Goldman’s research is always wrong). However, they have little to do with the price of gold. The money supply has grown steadily since 2011 while the prices of gold and silver have not. Hell, the money supply has been growing since forever. And the price of gold has gone up as well as down.

Continue reading Precious Metals Conspiracy

Bubble Economy or Not?

By Doug Noland

Credit Bubble Bulletin

“The US economy has made tremendous progress in recovering from the damage from the financial crisis. Slowly but surely the labor market is healing. For well over a year, we have averaged about 225,000 jobs (gains) a month. The unemployment rate now stands at 5%. So, we’re coming close to our assigned congressional goal of maximum employment. Inflation which my colleagues here, Paul (Volcker) and Alan (Greenspan), spent much of their time as chairmen bringing inflation down from unacceptably high levels. For a number of years now, inflation has been running under our 2% goal, and we are focused on moving it up to 2%. But we think that it’s partly transitory influences, namely declining oil prices and the strong dollar that are responsible for pulling inflation below the 2% level we think is most desirable. So, I think we’re making progress there as well. This is an economy on a solid course – not a bubble economy. We tried carefully to look at evidence of potential financial instability that might be brewing and some of the hallmarks of that – clearly overvalued asset prices, high leverage, rising leverage, and rapid credit growth. We certainly don’t see those imbalances. And so although interest rates are low, and that is something that can encourage reach for yield behavior, I certainly wouldn’t describe this as a bubble economy.”

Janet Yellen, April 7, 2016, International House: “A Conversation with Janet Yellen, Ben Bernanke, Alan Greenspan and Paul Volcker”

From my analytical perspective, unsustainability is a fundamental feature of “Bubble Economies.” They are sustained only so long as sufficient monetary fuel is forthcoming. Over time, such economies are characterized by deep structural maladjustment, the consequence of years of underlying monetary inflation. Excessive issuance of money and Credit are always at the root of distortions in investment and spending patterns. Asset inflation and price Bubbles invariably play central roles in latent fragility. Risk intermediation is instrumental, especially late in the cycle as the quantity of Credit expands and quality deteriorates. Prolonged Credit booms – the type associated with Bubble Economies – invariably have a major government component.

Continue reading Bubble Economy or Not?

Old Age

By Michael Ashton

The Fed has a fantastic record on one point: they are nearly flawless at misdiagnosing a patient who is sickening

In yesterday’s article, I neglected to mention one remark by a former Fed chair that bothered me at the time. However, I didn’t mention it because I thought the reason it bothered me was that it was vacuous – the sort of throw-away line that someone uses to stall while thinking of the real answer to the question. Since then, I’ve realized what specifically annoyed the subconscious me about the remark.

When Bernanke was asked about whether a recession is coming at some point; he glibly replied “Expansions don’t die of old age,” as if that was obvious and the questioner was being a dolt. Like so much of what Bernanke says, this statement is both true, and irrelevant.

Human beings, also, don’t die of old age. There is a cause of death – something causes a person to die; it isn’t that their library card of corporeality became overdue and they expired. The cause may be a heart attack, a slip-and-fall in the bathtub, cancer, pneumonia, complications from surgery, or the flu, but death is the result of a cause. It just happens that as a person gets older, the number of potential causes multiplies (a newborn rarely has a heart attack) and the number of causes that become fatal to an old person, where they would be merely inconvenient to a hale person, increases as well. As we age, parts of our bodies and immune systems weaken – and that’s where death sneaks in.

Think of those weaknesses as…let’s call them imbalances that have accumulated.

The statement that expansions don’t die of old age is literally true. Something causes them to die. It may be monetary error, but as Volcker pointed out last night in answer to a different question, there were recessions long before there was a Federal Reserve. Expansions also can die from a diminution of credit availability, from energy price spikes, from malinvestment, from an overextension of balance sheets that leads to bankruptcies…from a myriad of things that may not kill a young, vibrant expansion.

The parallel is real, and the point is that while this expansion was never very vibrant the current imbalances are legion. The Fed may not see them, or may believe them to be small (like Bernanke’s Fed felt about the housing bubble and Greenspan’s Fed felt about the equity bubble). But the Fed has a fantastic record on one point: they are nearly flawless at misdiagnosing a patient who is sickening.

Eurodollar CoT Throws a Curveball

By Tom McClellan

Eurodollar COT Throws a Curveball

Eurodollar COT leading indication
April 08, 2016

This week I revisit one of my favorite indicators.  But “favorite” does not mean perfect.

In 2010, I figured out that the net position of commercial traders of eurodollar futures gave a great leading indication for what stock prices would do a year later.  Subsequent research showed that this has been going on since around 1997, which is when the eurodollar futures contract really started to come into prominence as a financial product.  The only explanation I have for why it “works” is that somehow the big-money commercial traders of these interest rate futures products somehow are detecting and manifesting future liquidity flows that will affect stock prices a year later.  Beyond that loose explanation, I cannot decipher the nuts and bolts of why this works.

Continue reading Eurodollar CoT Throws a Curveball

Mount Easemore

By Michael Ashton

In short, all of these notable central bankers (which is a little like saying “these notable hobos”) seemed to agree that everything is just fine

Thursday evening’s public discussion between Fed Chairman Janet Yellen and former chairmen Volcker, Greenspan, and Bernanke – these last three in order of gravitas and effectiveness and (perhaps not unrelatedly) reverse order of academic accomplishment – was a first. Never before, apparently, have four current and former Fed chairmen appeared on the same stage. This is less amazing than it seems: prior to Alan Greenspan it was the practice of the Federal Reserve to remain out of the limelight.

Honestly, we all probably would have been better off had they stayed there.

Still, it was a fascinating event. The International House, which hosted the event, called it the “Fabulous Four Fed chairs,” but since they did not serve contemporaneously a better image is probably Mount Rushmore…if Mount Rushmore had the faces by Nixon, Hoover, Carter, and Andrew Johnson instead of Washington, Lincoln, Teddy Roosevelt, and Thomas Jefferson.

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Credit Markets Point to Rising Default Rates

By Chris Ciovacco

Yield vs. Safety Of Principal

If an investor was given the opportunity to invest in two nearly identical bonds with one bond paying 2% per year and the other paying 6% per year, logic says most would choose to invest in the higher-yielding bond. In the real world, the bond paying 6% also comes with a higher risk of default. Therefore, when investors start to become more concerned about the economy and rising bond default rates, they tend to gravitate toward lower-yielding and safer bond ETFs, such as IEF, relative to higher yielding alternatives, such as JNK. The chart below shows the performance of JNK relative to IEF. The chart reflects a bias toward return of principal over yield.

credit markets, default rates

Some cracks have started to appear in the credit markets in 2016. From CNBC:

Continue reading Credit Markets Point to Rising Default Rates

TIPS and Gold – Cousins, Not Brothers

By Michael Ashton

Gold is closer to “right” here, and breakevens still have quite far to go

A longtime reader (and friend) today forwarded me a chart from a well-known technical analyst showing the recent correlation between TIPS (via the TIP ETF) and gold; the analyst also argued that the rising gold price may be boosting TIPS. I’ve replicated the chart he showed, more or less (source: Bloomberg).


Ordinarily, I would cite the analyst directly, but in this case since I’m essentially calling him out I thought it might be rude to do so! His mistake is a pretty common one, after all. And, in fact, I am going to use it to illustrate an important point about TIPS.

Continue reading TIPS and Gold – Cousins, Not Brothers