The Ultimate Financial Crisis Will Be Inflationary

By Steve Saville

I’ve read many comments to the effect that the next financial crisis will be like 2007-2008, only worse. However, the sole reason that many people are talking about a coming 2008-like crisis is because the happenings of 2008 are still fresh in the memory. Market participants often expect the next crisis to look like the last one, but it never does. Consequently, the general prediction about the next financial crisis with the highest probability of success is that it won’t be anything like 2008. It could, for example, revolve around an inflation scare rather than a deflation scare. In fact, the current monetary system’s ultimate financial crisis, meaning the crisis that leads to a new monetary system, will have to be inflationary.

The ultimate financial crisis will have to be inflationary, because deflation scares provide ‘justification’ for central bank money-pumping and thus enable the long-term credit expansion to continue with only minor interruptions. To put it another way, a crisis won’t be system-threatening as long as it can be ameliorated by central banks doing what they do best, which is promote inflation.

A related point is that a crisis won’t be system-threatening as long as it involves an increase in demand for the official money. The 2007-2008 crisis was such an animal. Like every other crisis in the US since 1940 it did not involve genuine deflation, almost regardless of how the word deflation is defined. The money supply continued to grow, the total supply of credit did no worse than flatten out, and, as illustrated by the following long-term chart, there was nothing more than a downward blip in the Consumer Price Index. However, with the stock market losing more than half its value and commodity prices collapsing, for 6-12 months it sure felt like deflation was happening.

CPI_LT_151018
Chart source: dshort

Continue reading The Ultimate Financial Crisis Will Be Inflationary

A Look At How Fridays Create The Most Reliable Bounces

By Rob Hanna

Friday is generally not terribly reliable in being a day where the market bounces from a low. It is one of the least popular days for this to occur (along with Wednesday). But a potential positive about a Friday bounce is that when they do occur, they tend to be the most reliable moving forward. The below tables look at performance following a bounce from a 50-day low. The 1st table looks at performance 1 day later, and the 2nd table looks at performance 5 days later.

2018-10-14-1

Continue reading A Look At How Fridays Create The Most Reliable Bounces

USDCNY – It’s Going to 7

By Callum Thomas

Here’s a couple of charts on a topical and divisive subject – the outlook for the Chinese yuan.  This is something I’ve spent a lot of time looking at, and have been bearish Renminbi vs US dollar for a few good reasons.  Before we look at the charts let’s talk about why.  It’s basically 3 reasons, and it’s mostly about the fundamentals: 1. Economic divergence (China’s economy is slowing vs US accelerating); 2. Policy divergence (Fed hiking rates + QT vs PBOC cutting RRR, easing liquidity); 3. Politics (CNY weakness provides a timely offset against tariffs, and eases domestic pressure).

1. Interest Rate Differentials: The first chart maps the USDCNY against monetary policy rate differentials. Interest rate differentials are a fairly well established indicator for exchange rates because they reflect incentives e.g. borrowing in one currency (lower interest rate) and investing in the other (higher interest rate), and also reflect divergences in economic developments and monetary policy cycles. If you take this chart literally the USDCNY could end up going well beyond 7 …on that note, this is basic economics, not competitive devaluation.

Continue reading USDCNY – It’s Going to 7

Rude Awakening Coming

By Doug Noland

Credit Bubble Bulletin

There’s little satisfaction writing the CBB after a big down week in the markets. Motivation seems easier to come by after up weeks, perhaps my defiant streak kicking in. I find myself especially melancholy at the end of this week. There’s a Rude Awakening Coming – perhaps it’s finally starting to unfold.

Many will compare this week’s market downdraft to the bout of market tumult back in early-February. At the time, I likened the blowup of some short volatility products to the June 2017 failure of two Bear Stearns structured Credit funds – an episode marking the beginning of the end for subprime and the greater mortgage finance Bubble. First cracks in vulnerable Bubbles. Back in 2007, it took 15 months for the initial fissure to develop into the “worst financial crisis since the Great Depression.”

I posited some months back that tumult in the emerging markets marked the second phase of unfolding Crisis Dynamics. I have argued that the global government finance Bubble, history’s greatest Bubble, has been pierced at the “periphery.” More recently, the analytical focus has been on “Periphery to Core Crisis Dynamics.” I’ve chronicled de-risking/deleveraging dynamics making headway toward the “Core.” This week the “Core” became fully enveloped, as the unfolding global crisis entered a critical third phase.

Continue reading Rude Awakening Coming

Gold Man! Net-shorts In Gold Futures/Options Largest Since 2006

By Anthony B. Sanders

But Will It Continue After Last Week’s Bloodbath In Equities?

Too bad Black Sabbath didn’t sing Gold Man.

Hedge funds and other large speculators increased their net-short position in gold futures and options in the week ended Oct. 9 to the most in data going back to 2006, surpassing a record reached last month, according to a government report released Friday. The wagers came days before turmoil in equity markets sent investors flocking back to the metal, pushing prices to the biggest gain since 2016 on Thursday after six straight monthly losses.

thebiggoldshort

Let’s see if gold shorts continue with the reversal of fortune in the S&P 500 index and gold.

Continue reading Gold Man! Net-shorts In Gold Futures/Options Largest Since 2006

Cyclicals vs. Defensives

By Callum Thomas

Quick chart-flash.  The path of global cyclicals vs defensives has been something I have been very focused on, as both a leading indicator of a potential correction, and as a way to ride out the upcoming market volatility (disproportionately allocating to defensives, or long defensives + short cyclicals).  Anyway, this here chart I find particularly interesting, I had previously showed this chart around, but that was before US cyclicals vs defensives had started to move.  The risk here is that we see more “catch down” by the US, as it appears EM weakness may finally be catching up to America…  of course another interpretation is that it’s simply delayed reaction to Fed tightening – which has had an earlier and deeper negative impact on emerging markets.

Definitely one to keep an eye on – and probably a good idea for me to cover global cyclicals vs defensives in the next weekly report!

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Post-CPI Summary

By Michael Ashton

Below is a summary of my post-CPI tweets.

  • Only 20 minutes to CPI!
  • This month, we are looking for something of a correction to last month’s terribly weak and surprising core CPI (0.08% m/m).
  • Recall that last month, Apparel plunged -1.6% m/m – which seems at odds with a world of higher landed costs due to tariffs.
  • The only way that would make sense is if BLS were backing out the tariffs from the retail prices, but this isn’t like sales tax – no good way to disentangle tariffs since some products have ’em and some don’t.
  • So Apparel prices are due for a bounce. That’s well-understood out there in inflation land I think.
  • The apparel plunge was the driving force pushing core goods to -0.2% y/y when it had gotten all the way up to 0.0% y/y the prior month. It’s hard to get a lot of inflation without core goods being positive!
  • Other parts of core goods remain perky, such as Used Cars and Trucks. Probably some further gains due there.
  • The core services component was also soft last month, as OER softened slightly (but it has a big weight) and medical care declined.
  • I’m starting to get less confident that Medical Care will have a big upswing because of work I’m doing in pharma inflation. But at the same time, the y/y looks like it may have fallen too far too fast. And I don’t think doctors’ services +0.8% y/y makes a lot of sense.
  • All in all, the odds I think favor a solid 0.2% or above. This would cause y/y core to reaccelerate from 2.19% back to the 2.3% range b/c we’re dropping off an 0.13% from last Sept. To get a 2.4% print on core, we’d need 0.29% or better m/m, which is a stretch.
  • …but not out of the question if last month’s surprises are totally reversed.
  • The bottom line I am really watching is core-ex-shelter, which has been rising and is the key to the next leg higher in inflation. Housing won’t carry the water.
  • We’re down to about 12 minutes here before the number and one thing I want to add: more than recent CPIs this is likely a pretty important number for the stock market. Climbing CPI –> higher rates;stocks aren’t handling that well right now. A soft CPI is really good for stocks.

Continue reading Post-CPI Summary

Back to Back 50-day Lows and Extremely Low RSI(2) Readings

By Rob Hanna

Strongly oversold markets often contain a short-term upside edge. Of course oversold can always become more oversold. Wednesday took the SPX down to a 50-day closing low. Additionally, many short-term price oscillators, like the RSI(2) showed extremely low readings. Further selling on Thursday meant another 50-day low and even lower readings.

The study below appeared in the Quantifinder on Thursday afternoon. It looked at other times the SPX posted back-to-back 50-day lows and extremely low RSI(2) readings.Instances are a little lower than I typically like, but the numbers are incredibly bullish and seem worth noting. I am seeing several studies right now all suggesting a bounce is highly likely in the next few days. This study is just one such example.

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The Pretium $PVG Show Continues: 3q18 Production Numbers

By Otto Rock

Here’s the link, here’s the headline number sat next to the previous quarters:

That’s 92.641oz to you, madame and sire. Behind that, the 12.4 g/t average gold grade will make a few people go “hmmmm…”, it’s significantly behind the 14.9g of Q2.

No position in PVG. Staying that way.

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