Savers Are Just Collateral Damage, Report 29 Apr 2018

By Keith Weiner

A reader asked us this week about the personal savings rate. Most people can sense that something is wrong if the rate is in a long-term falling trend, or if it falls too low (whatever level that may be). We argue that falling savings is part of the larger process of capital destruction. And unfortunately, one should expect falling savings rates when there is falling yield purchasing power.

The personal savings rate is defined as the ratio of personal saving to disposable personal income. Income excludes capital gains (as it should!) It is a measure of how much is left. This savings will pay for the saver’s own future, and in the meantime it is (presumably) invested to finance the production of new goods and services (and the government’s ever-growing welfare expense).

The personal savings rate is in a secular decline. As with other trends we have examined (e.g. marginal productivity of debt), the decline has a high correlation with the falling interest rate. Here is a graph.

Continue reading Savers Are Just Collateral Damage, Report 29 Apr 2018

That Collapse You Ordered… ?

By James Howard Kunstler

I had a fellow on my latest podcast, released Sunday, who insists that the world population will crash 90-plus percent from the current 7.6 billion to 600 million by the end of this century. Jack Alpert heads an outfit called the Stanford Knowledge Integration Lab (SKIL) which he started at Stanford University in 1978 and now runs as a private research foundation. Alpert is primarily an engineer.

At 600 million, the living standard in the USA would be on a level with the post-Roman peasantry of Fifth century Europe, but without the charm, since many of the planet’s linked systems — soils, oceans, climate, mineral resources — will be in much greater disarray than was the case 1,500 years ago. Anyway, that state-of-life may be a way-station so something more dire. Alpert’s optimal case would be a world human population of 50 million, deployed in three “city-states,” in the Pacific Northwest, the Uruguay / Paraguay border region, and China, that could support something close to today’s living standards for a tiny population, along with science and advanced technology, run on hydropower. The rest of world, he says, would just go back to nature, or what’s left of it. Alpert’s project aims to engineer a path to that optimal outcome.

Continue reading That Collapse You Ordered… ?

An Update on Gold’s True Fundamentals

By Steve Saville

[biiwii comment: you go Steve; love the * at the end, which I obviously agree with]

I update gold’s true fundamentals* every week in commentaries and charts at the TSI web site, but my most recent blog post on the topic was on 20th March. At that time the fundamental backdrop was gold-bearish. What’s the current situation?

The fundamental backdrop (from gold’s perspective) is little changed since 20th March. In fact, it has not changed much since early this year. My Gold True Fundamentals Model (GTFM), a weekly chart of which is displayed below, turned bearish during the first half of January and was still bearish at the end of last week. There have been fluctuations along the way, but at no time over the past 3.5 months has the fundamental backdrop been supportive of the gold price.


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Two Seasonal Cycles Colliding Suggest A Possibly Volatile Period Ahead

By Rob Hanna

As we head towards the summer, the stock market has two long-term cycles converging that suggest it could be a rough ride. The 2 cycles are the “Best 6 Months” and the “Presidential Cycle”. I cover both of these cycles in detail in the Quantifiable Edges Market Timing Course. Here I will show how the market has performed historically when these two cycles have been in unfavorable phases at the same time.

The “Best 6 Months” cycle was originally published by Yale Hirsch of the Stock Traders’ Almanac. It notes that the market has performed substantially better between November and April than it has from May to October. In fact, a massive portion of the total market gains over time have occurred just in the November – April period.

The Presidential Cycle looks at the 4-year presidential term. The basic idea is that the market performs better during years 3 and 4 of a presidential term than it does during years 1 and 2. When a new US president comes into office, he will often spend much of the 1st year discussing what a bad job his predecessor did, and how tough times are upon us. This allows him to push through policy changes. These changes will often take up much of the 1st two years, and there tends to be significant arguing about whether they are positive changes or not. In general, the 1st two years have a fair amount of turmoil, and this is often reflected in the action of the stock market. Years 3 and 4 the big policy changes are over with and the president is thinking about re-election. Therefore, the rhetoric will change from negative to positive. The improved mood will often be supportive of stock market rallies. One exception to the Presidential Cycle basic rules is that Year 1 has not been negative when we have a 2nd term president. He’s not going to tell you how bad the last guy was, because it was him! So the unfavorable periods of a Presidential Cycle are: Year 1s of a 1st-term president and all Year 2s.

Continue reading Two Seasonal Cycles Colliding Suggest A Possibly Volatile Period Ahead

A Gold Sector Fundamental View


With gold testing its 200 day moving average this morning I thought I’d reproduce the first part of the precious metals segment from week’s Notes From the Rabbit Hole (NFTRH 497), including a daily chart of gold at the end showing the anticipated SMA 200 test.

Precious Metals

We have done a lot of work delineating what the best investment environment would be for gold and especially the gold mining sector. The gold miners leverage (for better or worse) gold’s performance vs. cyclical items like stocks, commodities and materials. Gold vs. stocks is a macro fundamental indicator on investor confidence, or lack thereof. Gold vs. Energy and Materials are gold sector fundamentals directly informing a gold mining company’s bottom line performance (their product vs. mining cost inputs).

When inflation is taking root and the economic cycle is up, the gold sector is suspect for the reasons stated above. It is and has been suspect to this point by definition, because gold is either in long-term down trends (vs. stocks) or has been flat lining for 2 years (vs. commodities). Let’s realize that gold and the gold sector can and probably would go up in an inflationary boom (assuming gold were out performing stocks) but the fundamentals would degrade as long as the economy remained firm.

Continue reading A Gold Sector Fundamental View

Deficits and Gold

By Tom McClellan

Deficits and Gold

If you are a gold investor, then the one thing you want most is rising deficits.  Luckily for you, Congress appears to have granted just what you want.

This week’s chart compares the trailing 12-month federal deficit (as a percentage of GDP) to gold prices.  The correlation is not perfect, but it is pretty good over time.  The implication is that rising deficits should be bullish for gold prices.

That certainly was the case during the 2000s, following the supposed surpluses of the late 1990s.  Those were not actual surpluses, as the total federal debt actually went up in every one of those years.  But for federal bookkeeping purposes, they were counted as surplus years.  And gold certainly did poorly while that was going on.

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Investors Becoming More Confident on Risky Assets

By Callum Thomas

The April round of the State Street global investor confidence indexes showed institutional investors appear to be growing more confident on the outlook for risky assets.  The regional indexes showed this uptick in risk appetite has been widespread across the major regions.  It appears as though institutional investors are looking through much of the “noise”, and focusing on the reset in sentiment and valuations against the backdrop of decent earnings and economics.  With this group of investors controlling large sums of money it will be interesting to see if this increased confidence translates into higher stock prices.

The key takeaways from the latest State Street investor confidence index results are:

-Global institutional investors are increasing allocations to risky assets.

-The uptick in investor confidence is widespread across the major regions.

-The investor confidence indexes are quantitative indicators, and take account of actual changes in allocations across State Street’s $30 trillion global custodian business.

-As the Euphoriameter shows, there has been a reset in ‘investor euphoria’ driven by lower valuations, higher volatility, and less bullishness in the surveys.

1. Global Institutional investor Confidence Index:  The April reading of the State Street global investor confidence index showed a further rise, +3pts to 114.5, which is the strongest reading since March 2016 – which coincidentally was just after a substantial stock market correction.  Basically institutional investors are feeling fairly confident on the outlook for risky assets, and appear to be looking through the noise (trade wars, geopolitics, etc) and focusing on the reset in valuations, decent earnings results, and solid global macro pulse.

You Haven’t Missed It

By Michael Ashton

A question I always enjoy hearing in the context of markets is, “Have I missed it?” That simple question betrays everything about the questioner’s assumptions and about the balance of fear and greed. It is a question which, normally, can be answered “no” almost without any thought to the situation, if the questioner is a ‘normal’ investor (that is, not a natural contrarian, of which there are few).

That is because if you are asking the question, it means you are far more concerned with missing the bus than you are concerned about the bus missing you.

It usually means you are chasing returns and are not terribly concerned about the risks; that, in turn – keeping in mind our assumption that you are not naturally contrary to the market’s animal spirits, so we can reasonably aggregate your impulses – means that the market move or correction is probably underappreciated and you are likely to have more “chances” before the greed/fear balance is restored.

Lately I have heard this question arise in two contexts. The first was related to the stock market “correction,” and on at least two separate occasions (you can probably find them on the chart) I have heard folks alarmed that they missed getting in on the correction. It’s possible, but if you’re worried about it…probably not. The volume on the bounces has diminished as the market moves away from the low points, which suggests that people concerned about missing the “bottom” are getting in but rather quickly are assuming they’ve “missed it.” I’d expect to see more volume, and another wave of concern, if stocks exceed the recent consolidation highs; otherwise, I expect we will chop around until earnings season is over and then, without a further bullish catalyst, the market will proceed to give people another opportunity to “buy the dip.”

Continue reading You Haven’t Missed It

Shooter McGavin, Bond Trader Extraordinaire

By Kevin Muir 

This afternoon some big shooter put on a monster U.S. steepening / German flattening bond trade. The specifics of the trade were;

  • buy 100,174 US five-year treasury futures
  • sell 63,887 US ten-year treasury futures
  • sell 65,362 German bobl futures (5-year)
  • buy 29,145 German bund futures (10-year)

I did get a few pings asking if I was busy writing some tickets, but alas, the ‘Tourist’s positions have a lot less digits. According to Bloomberg, this position has $4.7 million of DV01 risk (dollar-value per basis point). That’s way above my pay grade, but it’s worth thinking about the rationale behind this whale’s trade.

Let’s break the trade into two parts. The first is the US side. The trader bought the five-year US treasury future and sold the ten-year US treasury future. This half of the trade will profit if the U.S. treasury yield curve steepens between the 5 and 10 year portion of the curve.

Continue reading Shooter McGavin, Bond Trader Extraordinaire

A Fiscal/Monetary Mole Stew


See this Bloomberg article for a look at the ingredients in a policy stew that looks like it was scraped off the floor of Worst Cooks in America. Click the headline for the article.

Federal Reserve policy makers seem to be working at cross purposes.

In laying out plans to ease some constraints imposed on banks after the financial crisis, the Fed is moving to free up tens of billions of dollars for financial institutions to lend to promote faster economic growth.

At the same time it is reducing its balance sheet and gradually raising interest rates to restrain credit creation and keep the economy in check.

So tell me, why are they speaking out of both sides of their orifice? Is it because of the need to keep an object in motion (in this case, a hyper-stimulated economy within a Keynesian debt-for-growth system) hurtling forward at an ever increasing pace? Why can’t we just have a quiet end and soft landing to the boom that began in 2009? Ha ha ha, you know the answer already.

Continue reading A Fiscal/Monetary Mole Stew

Bi-Weekly Economic Review: Interest Rates Make Their Move

By Joseph Calhoun

How quickly things change in these markets. In the report two weeks ago, the markets reflected a pretty obvious slowing in the global economy. In the course of two weeks, what seemed obvious has been quickly reversed. The 10-year yield moved up a quick 20 basis points in just a week, a rise in nominal growth expectations that was mostly about inflation fears. The economic news over the last two weeks does not appear to support the move in rates but our process puts more emphasis on markets and less on individual economic reports. So, I’ll accept that inflation fears – and fear of the Fed’s response – have driven rates higher over the last week. Whether those fears are warranted is open to question.

Even after the move up in rates, the overall outlook for the economy hasn’t changed much. Real interest rates are still stuck in the same range they’ve been in since mid-2013 and the nominal 10-year rate is within a similar range that has prevailed since 2011. Both though are right at the top of those ranges and the obvious question is whether rates will continue higher. Or to put it a little differently, is nominal growth – real growth plus inflation – about to move into a new, higher range?

While I can’t answer that question definitively, I do have my doubts. Every tightening cycle in my career has seen long-term rates peak at a lower level and I don’t think this one will be any different. The 10-year rate has already doubled from the lows, a bigger move than any tightening cycle in my career (and this is the fourth major one). It is tempting to say this time will be different because the Fed held short rates lower for longer this time than even the last cycle when that caused so many problems. But it seems to me that doing so makes the economy more sensitive to higher rates, not less. Debt levels are higher today, in the US and globally, than they were in the last cycle. Higher rates will bite sooner than they have in the past.

As for inflation, earnings reports and company calls indicate that companies are not able to pass through rising raw materials costs and that is hitting margins. That’s what drove the selloff in Caterpillar shares this week after a very good earnings report and it isn’t just one company having that problem.

Could interest keep rising? Obviously, the answer is yes but that depends on the economic data and how market participants interpret that data with respect to Fed policy. We’ve already seen some moderation in sentiment and in the regional Fed surveys. We get a durable goods report tomorrow and Q1 GDP Friday. Expectations are for growth of about 2%. Anything significantly different than that view will probably move markets.

Economic Reports

Economic Growth & Investment

Continue reading Bi-Weekly Economic Review: Interest Rates Make Their Move