After a couple of large down days and a big gap up Wednesday morning, the rest of Wednesday was a disappointment for the bulls. But the failure to follow through on the morning strength is not necessarily a bad sign looking out over the next couple of days. The study below from the Quantifinder was shown in last night’s subscriber letter.
Instances are very low here, but we see some examples of powerful buying over the next few days. While I am seeing a mix of studies right now, this one favors the bulls. Traders may want to keep this in mind as they consider their trading bias.
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Now that we’re in an honest-to-God bear market………….thank the maker…….I am obsessing over charts even more than I normally do (which is saying a lot). I’ve noticed that the most interesting charts are those which are breaking down in stages. That is, they will be locked into a range-bound period of consolidation, and then some “shock event” will lurch them down to a new, lower range, and they’ll stay locked there. It makes for good use of horizontal lines. Apple is a good example:
Indeed, it makes me think that this bear market could be defined as one with “stages of rages”, instead of the old-fashioned name for a bear market which was……..let me think…….oh, yes: a slope of hope.
All through the bear market hopeful rationalizations were served up for a bullish case on the gold miners. All through the bear market we warned people not to eat that rotten turkey!
China demand, the China and India “love trade”, cyclical inflation driving up the prices of commodities and resources and the classic… economic growth in the US will create cost-push inflation through wage increases with the smart money seeking inflation protection in gold. All of those and a veritable Turducken of mishmashed ingredients were served to gold bugs as a decidedly not delectable appetizer before the main course.
But with a top in risk ‘on’ global markets now finally including the US (pending any holiday relief bouncing), the planets are aligning per the fundamentals that matter. This will drive up gold’s relational price to cyclical risk ‘on’ assets and improve gold mining bottom line operations (reducing miners’ costs per ounce of gold produced).
The sector will also be more appetizing to a much wider range of investors, now that their perceived sure things in the FAANGs and other momentum fueled, ‘can’t miss’ areas (like the Semi sector, which we warned on long ago: Semi Canary Still Chirping, But He’s Gonna Croak in 2018) are no longer working.
Authored by Trey Reik, Senior Portfolio Manager, Sprott Asset Management USA, Inc.
On November 14, Fed Chair Jerome Powell and Dallas Fed President Robert Kaplan conducted an onstage question and answer session at the Dallas Fed. Responding to President Kaplan’s questions, Chair Powell’s cool-and-collected delivery made U.S. monetary policy seem like an absolute snap. The upbeat message from the Dallas stage was best summed by Mr. Powell’s observation that “Fed policy is part of the reason the economy is in such a good place right now.” However, because U.S. financial markets have remained noticeably rattled ever since Mr. Powell’s seemingly innocuous “long way from neutral” comment on 10/3/18, we find it constructive to parse cautious nuggets in Chair Powell’s copasetic narratives.
Along these lines, Chair Powell seemed to imply from the Dallas stage a subtle downshift in telegraphed Federal Open Market Committee (FOMC) tightening in stating “we have to be thinking about how much further to raise rates and the pace at which we will raise rates.” After referencing potential headwinds of slowing growth abroad, fading fiscal stimulus and lagged effects of eight Fed hikes, Chair Powell eventually narrowed in on one specific area of growing Fed concern: excessive corporate leverage. In Mr. Powell’s soft-spoken words, “There is some significant corporate borrowing and we have our eyes on that.” Having subsequently refreshed our focus on U.S. corporate debt levels, we can only characterize Chair Powell’s matter-of-fact depiction as dramatic understatement.
Corporate Leverage Locomotive
We have suggested improving U.S. bank balance sheets foster false investor confidence that the excessive leverage at the root of the financial crisis has been repaired. In reality, as the Fed has dedicated eight years and trillions of dollars to nursing systemically important banks back to health, QE (quantitative easing) and ZIRP (zero interest rate policy) have progressively compromised the financial strength of the U.S. corporate sector. Not only have share buybacks imperiled countless balance sheets in the name of ephemeral EPS (earnings per share) gains, but the bulk of U.S. corporate governance has eroded into a culture of undisciplined borrowing and zombie credits.
Last December, something clearly broke. The global basis had swept far under zero again, an ominous sign that eurodollar banks were having trouble creating, finding, and redistributing global funding. A cross currency basis swap is one way to do it, the negative basis indicating a desperate shortage of dollars offshore (eurodollars).
The negative basis wasn’t the only thing suggesting dramatic distress. Concurrently, the domestic repo market had exploded. Repo fails for the week of December 13, 2017, were an astounding $832 billion, the very same moment the cross currency basis (especially against euros) fell off a cliff. Our Chart of the Week for that same week essentially predicted what FRBNY would report for fails:
When the Fed a week later published the data from primary dealer call reports, the updated chart looked like this:
The United States: US railcar loadings (an indicator of economic activity) are still well above the levels we saw in previous years. However, railcar loadings of cyclical cargo have slowed more than they did in 2017 for this time of the year.
China: Lower government bond yields should support the housing market next year.
Trillions of dollars in equity lost. Silicon Valley stocks down 40%, 50%, 70%, or more. Dejected and disillusioned millennials. The smoldering ruins of the failed cryptocurrency industry.
I’m honestly not sure how much more happiness I can take. On top of it all, Slope traffic is going absolutely apeshit (which is kind of bad news, in a way, since we’re frantically trying to keep up with the demand of our suddenly very, very popular website).
And to think this is just the start of a multi-year, global bear market that is going to bring utter ruin to so many. I can hardly stand the excitement. Thus, I thought we’d catch up on my short term “Omega” prediction, which I’ve discussed before, most recently here.
Specifically, where do things stand with respect do the conjectural pattern I suggested?
Well, if this is to transpire, this is kind of what’s next:
Most warnings about large increases in government indebtedness revolve around future repayment obligations. For example, there is the concern that greatly increasing the government debt in the present will necessitate much higher taxes in the future. For another example, there is the concern that if the debt load is cumbersome at a time of very low interest rates, then as interest rates rise the interest expense will come to dominate the budget and lead to an upward debt spiral as more money is borrowed to pay the interest on earlier debt. Although these concerns are valid they miss two critical points, including the main problem with government borrowing.
The first of the missed points is that there is no intention to repay the debt or even to reduce the total amount of debt. This is one way that government debt is very different to private debt. Nobody would ever lend money to a private organisation unless there was a good reason to believe that the debt eventually would be repaid, but when it comes to the government the plan is for the total debt to grow indefinitely. It will grow faster during some periods than other periods, but it will always grow. Therefore, it makes no sense to agonise over how the debt will be repaid. It simply won’t be repaid or even reduced.
I love the ocean which is ironic as I live on a Great Lake more than 1,500 kilometers from the Atlantic. But you put me anywhere near an ocean and I guarantee it – I am jumping in. It doesn’t matter if the water is 15 degrees, I have to go for a dip.
Not having grown up with all the ocean-life, I try to rationalize my slight fear of sharks by convincing myself that my apprehension is like many other people’s fear of bears. Having spent many weekends at a cottage in the Canadian wilderness, I probably have an overly casual attitude towards bears. To me, they are just big raccoons. Yeah, a hungry grizzly deserves your complete and total respect, but most black bears want absolutely nothing to do with humans. After seeing dozens upon dozens in the wild, you realize they are not so scary. And this logic is what I use when thinking about sharks. Most of them want nothing to do with you.
However, I recently stumbled upon this research group that tracks different sharks, but specializes in Great Whites.
A long time ago in a galaxy far, far away we wrote a series of articles arguing that bitcoin is not money and is not sound. Bitcoin was skyrocketing at the time, as we wrote most of them between July 30 and Oct 1 last year.
Back in those halcyon days, volatility was deemed to be a feature. That is, volatility in the upward direction was loved by everyone who said that bitcoin is money, in their desire to make money. In the first instance of the word, the term money refers to bitcoin. In the second, it refers to the dollar. The same problem we see with gold:
bitcoin is money
bitcoin is going up
buy bitcoin now
sell bitcoin later at a higher price
to make money
From what we remember from a logic class in the philosophy department back in university (in the halcyon days long before the halcyon days of bitcoin skyrocketing), there may be a fallacy or two in here that have Latin names.
Anyways, in our bitcoin articles, we were careful not to get into the game of setting price targets. We didn’t know (and no one else did either, as it turned out) where the price would go. Other than, we did say that bitcoin has no firm bid and its price will drop when the speculators turn. Bitcoin had just hit $3000 when our series began. We were careful to say that the price could go a lot higher, and we made no prediction as to how high or when it would turn.