Coup de Whiskey

By: Bob Hoye | Fri, Jul 11, 2014
Print Email

The following is part of Pivotal Events that was published for our subscribers July 4, 2014.


Signs Of The Times

"Central banks around the world, including China's, have shifted decisively into investing in equities as low interest rates have hit their revenues."

- Financial Times, June 16

"Deal frenzy, animal spirits, merger mania - call it what you like, it is back.
At the highest pace since 2007. "

- Financial Times, June 29

"China's fraud scandal continues to widen, with more companies reporting losses in bogus aluminum and copper financing deals, while Chinese authorities now say gold contracts have also been faked to secure more than$15 billion in loans."

- New York Times, June 27

"Investors Trawl for Yield in Unexpected Waters"

"Countries previously off many investors' radar - including Zambia, Kenya, Ecuador, Cyprus and Greece - issued debt in the second quarter. Many of the offerings drew strong investment support."

"Ecuador sold $2 billion of 10-year bonds, marking a return to international debt markets after defaulting six years ago. They were priced at 7.98%."

- Wall Street Journal, June 30



We might have headed this section with "Modern Portfolio Theory meets Modern Central Banking". With desperate bankers buying equities, the latter does not deserve the distinction of a theory.

Early in June, Stephen Hawking, the theoretical physicist, mused:

"Artificial intelligence could be a real danger in the not too distant future."

Now let's see how this works in policyland. Get a PhD in currency depreciation and interest rate manipulation and you can get a job in Wall Street or with a trade union. If your career path goes well you can become the head of the Fed and the financial media will worship you. Granting some kind of super intelligence, artificially as it were.

It is reported that Alan Greenspan's record as a private economist was not outstanding, but his insight as Fed chairman was celebrated.

Essentially, central bankers meet ancient tribal needs for someone or some agency with supernatural powers. And when the US was between experiments in central banking the financial community celebrated the genius of the secretary of the treasury. Indeed if one was the secretary during a financial mania such as in the 1920s and 1990s you earned glorious ratings. In the Roaring Twenties Secretary Andrew Mellon was described as the greatest since the first one, Alexander Hamilton. Robert Rubin who had the shift during the Dot.Com Bubble was the next to become so praiseworthy.

Could this be called "Treasury Cachet"?

To be serious, the central banking cartel ran into severe trouble in 1998 with the LTCM blow up. Senior central banks were lending directly to the big hedge fund. The wager was that government bond yields would "converge" as the EU came together. The collapse was magnificent. Fortunately, only the Bank of Italy bought equity in the fund.

Now they are all buying equities.

Stephen Hawking please meet central banking - a very dangerous example of artificial intelligence.

Stock Markets

Our theme has been that stock action and business reports would be positive until adverse credit markets ended the party. Signs of a reversal in credit markets would likely become evident in the season for change - typically in May or June.

Stock and credit markets remain very enthusiastic and are becoming precarious - again.

Early in the week it seemed worthwhile to look for some long opportunities. Well, what seems a reasonable idea is difficult to realize.

Two weeks ago wheat and corn became very oversold and the action is basing.

Also two weeks ago we noted that base metals (GYX) were oversold enough to take another run at the 360 level. It has and more so. The index is at 367 and in four trading days base metal miners (SPTMN) have jumped from 823 to 904.

The ChartWorks covered some sector opportunities and will update.

These seem to be replicating our call in November for a big "Rotation".

Also as when going into March, the NDX is the focus of another buying frenzy. Using the Daily RSI it is now up to the most overbought readings since the excesses clocked in early 2000.

So what we see is a remarkable amount of froth and as this mounts so does our skepticism. This goes beyond that due to the technical measures of speculation and gets into the abilities of policymakers to "manage" yet another financial mania. We also question the establishment's endless discussions about what the Fed has been doing and should be doing.

This has been the most forced-fed (no pun intended) bull market in financial history.

Even more so than in 1929 when New York Fed head Benjamin Strong deliberately boosted the stock market. He infamously boasted the policy step as a "coup de whiskey".

A few years ago we had some fun with "Coups" and it is attached.

In engineering terms we have been discussing that policymaking has become a "positive feedback mechanism", applied relentlessly. In less technical words, the Fed thinks it has invented a perpetual motion machine. But then this is in keeping with the intentions of the original promoters of the Fed. They earnestly believed that a committee of experienced bankers would be able to prevent the financial setbacks that caused recessions.

How naïve and now how ancient!

More lately, the belief has been that a "Dream Team" of economists can manage a financial mania.

More immediately, the NDX rally is now generating Daily Upside Exhaustion readings.

This is the most powerful zoom since the blow-off in March 2000 and we are taking it as ending action.

Credit Markets

Typically, ending action in a stock market buying mania pushes the credit markets. We have been watching for change in the yield curve and credit spreads.

Nothing significant yet, but the curve has been flattening since earlier in the year. The last key reversal was accomplished in May 2007.

Junk has been rallying as if there was absolutely no risk. This has driven JNK to a Weekly RSI of 80.7, which is the highest on a chart back to 2008.

Earlier in June, emerging debt (EMB) reached the highest Weekly RSI since the peak at 115.86 in late 2012. Of interest is that this rally made it to 115.51 in early June and 115.26 last week. It looks like a current double top at the high of two years ago.

Recently the Ted Spread, which represents the shorter maturities, has been becoming interesting. Last week we noted that rising through the .227 level would get our attention.

It has made it to .229 and if the trend becomes more apparent it won't be anyone's friend.

Why are we going on about such small moves in credit instruments when the economy is finally generating some numbers that the establishment is getting excited about?

Thursday's unemployment number prompted "Kaboom! This report is one hot firecracker.....".

This is what is setting up the change in the credit markets.

The bond future made it to 138.25 at the end of May and that was against our target of 136 to 138. It became overbought enough on the Daily to recommend shortening term. It is down to 134 and is not oversold. There is support at 132 and that is the next target.

Precious Metals

As noted last week, gold ran into "congestion" at the 1330 level. With enthusiastic bidding, the silver/gold ratio soared to a Daily RSI of 84. Anything above 78 indicates mounting speculation. Readings of 92 in 2011 and 82 in 2012 were considered as "dangerous".

We've been considering the recent surge in speculation, while part of volatile conditions, as within the bottoming action in a cyclical bear for the gold sector. This is against the topping of the cyclical bull market in orthodox investments.

As concluded last week, we are looking for the next buying opportunity.

Excerpt from PIVOTAL EVENTS published November 1, 2007

Today the next crisis seems to have started.

In the meantime the October 17 Financial Times made some interesting points:

"A decade ago, when Asia was facing a financial crisis, American bankers and government officials regularly traveled to the region delivering homilies about the best way to exit a banking mess. After all - or so the lectures went - America had suffered bank crises, such as the Savings and Loan debacle of the late 1980s. This experience had shown that the best route to recovery was to establish realistic prices for distressed assets, by conducting fire sales if necessary, and then write the losses off. However, it seems that some US financiers seem to need to take a hefty swig of the medicine they used to wave at Asia."

Well, that problem is not just in America, but global financiers and central bankers combined to juice the markets, prompting impressive short covering.

It reminds of 1927 when faltering spirits with the collapsing Florida real estate bubble needed reviving. Ben Strong, then head of the New York Fed, told a French central banker that he was going to give the markets a "coup de whiskey". The rally was terrific but as it turned out, yet another story in the house of cards. It might just as well have been called a "coup de bourse", and it was celebrated as a "coup d'eclat", prompting a "coup de chapeau". For realists it was eventually seen as a failure ("coup de manque") as was all the preceding nonsense about managing "price stability". As for us, we would have been content with a "coup de beer".


Link to July 4 Bob Hoye interview on



Bob Hoye

Author: Bob Hoye

Bob Hoye
Institutional Advisors

Bob Hoye

The opinions in this report are solely those of the author. The information herein was obtained from various sources; however we do not guarantee its accuracy or completeness. This research report is prepared for general circulation and is circulated for general information only. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance.

Neither the information nor any opinion expressed constitutes an offer to buy or sell any securities or options or futures contracts. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report. In addition, investors in securities such as ADRs, whose values are influenced by the currency of the underlying security, effectively assume currency risk.

Moreover, from time to time, members of the Institutional Advisors team may be long or short positions discussed in our publications.

Copyright © 2003-2017 Bob Hoye

All Images, XHTML Renderings, and Source Code Copyright ©