The following is part of Pivotal Events that was published for our subscribers July 11, 2013.
Signs Of The Times
"Central banks sold a record amount of US treasury debt, while bond funds suffered the biggest ever investor withdrawal."
Now that was a "Get-Me-Out!" hit! This gem was from the Financial Times of June 29. It provides more evidence that Mother Nature pre-empted the Fed's "decision" to "taper" the bond-buying program.
Additional evidence of "pre-emption" was provided by the curve, in May, turning to dramatic steepening. The Fed's big policy was to narrow quality spreads by buying garbage in the form of sub-prime mortgage bonds.
After four years of a favourable trend, credit markets overwhelmed Fed efforts to provide the permanent bubble and have reversed.
"Countries from Turkey to Brazil to China are getting hit by a brutal combination of events, as economies slow, commodity prices tumble and protesters take to the street."
- Wall Street Journal, July 2
Interventionist economists still worship the notion of a national economy.
"The cost of borrowing in Hong Kong's Dim Sum market jumped the most on record in June; climbing to an all-time high as China's worst cash squeeze in at least a decade spurned concerns."
- Bloomberg, July 2
"Barclay's, Deutsche Bank and Credit Suisse had their credit ratings lowered by Standard & Poors."
- Bloomberg, July 8
"German Exports Dropped Sharply in May."
- International Business Times, July 8
Perspective
Fascinating times!
Disappointing economic news from a number of regions continues.
International credit markets suffered a serious drop in prices and commensurate rise in yields. This hit became very oversold and has bounced, but we consider the action as the key step to a more severe credit crisis in the fall.
This would have been possible even if the reversal in May had not been as severe. Then there is the possibility that the financial violence was enough to clear the markets of suddenly unsupportable positions.
Our view in early April was that the speculative surge was becoming impressive and this argued for the seasonal reversal. This is definitely the end of a bull in global credit markets and the degree of recklessness in the private sector will not be fully corrected by a set-back of only six weeks.
Then there is policymaker recklessness, which could take much more than six weeks to correct. Perhaps remorse and repentance could prevail over a couple of generations of central bankers.
Using the high-yield corp (HYG) as the example, the action is similar to the chart pattern from April to July 2008. That includes the swings in the Daily RSI.
The rebound from the mini-panic could run out of steam over the next few weeks. The low was 87.80 on June 24th and at 91.14 there is resistance at the 92.5 level. The high was 95.30 in early May. The low in the 2008 Crash was 42.99.
The point to be made is that credit markets are international and at important changes national central bankers have little influence upon the curve and spreads.
The karma of the market place is, again, starting to overwhelm the dogma of policymakers.
Long Treasuries
This is easier to write than to say "The bond future has suffered a precipitate plunge".
Yeth.
To be serious, it set a big rounded top with the high set at 153.37 as the Euro-Crisis was at its worst last July.
This time around long-dated treasuries have been part of the mini-panic, and are very oversold. The Daily RSI is down to 24. On a chart back to 1993, this level has only registered in 1994 and in 2006. This is enough to prompt a tradable rally.
Stock Markets
Relief following the mini-panic in the credit markets was likely to favour the stock market well into July.
Independent of this, Ross has had a potential high for the rebound for late in this week.
Also his target on crude is for an important high around the middle of this month. Often crude and the S&P will rally together and then decline together.
2008 provided a riveting example of both directions, with crude's slump beginning in that fateful July.
The near-by chart of Stocks/Treasuries suggests that the "flight" away from bonds is getting overdone. Within this, the Treasuries/High-Yield chart suggests that while the mini-panic hit all bonds treasuries plunged relative to lower-grade bonds.
This could reverse soon and would represent the old "flight to quality". While it will be a good trade for bond desks, the turn would be adverse for stocks.
It is limiting to look at the stock market in isolation, but we thought the rebound in the S&P could get to the 1654 level, which was the test of the high. Maybe a little further.
What's more, the street is focusing on good reports and miracles from the Fed. That was also the case in the summer of 2008.
Continue to sell the rallies.
Commodities
Last week this page noted that base metals (GYX) and agricultural prices (GKX) had extended their bear markets that had started in 2011. (Is the correct plural of bear market "bears market"? As in governors general.)
Also noted was that the action had become so dismal that a rally was possible. It looks like just stability would be a blessing.
After a two-year decline is tempting wonder if it is long enough to have flushed out unsupportable positions. On a chart since 1980, cyclical bears for copper have ended with the Weekly RSI at close to 20. The 2008 example ended at 17. Copper's Weekly RSI is now at 32.
Base metal miners (SPTMN) set new lows for the bear a couple of weeks ago. Some stability shows, but the Weekly RSI only got down to 29. On a graph back to 2002 that cyclical bear ended at 30 and the one in 2008 ended at 19.7.
The base metal sector is not cyclically oversold.
By contrast gold stocks are at a severe oversold seen only four times since the early 1900s.
Precious Metals
We would rather have any rise in precious metals unattended by statements by Bernanke.
These have become absurd. Speculative action in credit markets reversed naturally, but with some conviction, and Bernanke mumbled something about "Tapering". At the time this page noted that it was uttered to look like the Fed was in charge.
Credit markets crashed, not because of the comments, but because the rise had become excessive. Central bankers have been disquieted by the mini-panic and Bernanke has been forced to renew his vows to depreciate forever.
It reminds of the end of the great bubble in the Nikkei in late 1989. Some policymakers became concerned about looking prudent and tried to talk the stock market down. In early 1990 as the action broke one spokesman became concerned about the initial hit and called for a reduction of margin requirements. Hoping it would avert calamity.
That was on something like a 12 percent slump, and as fate willed it the rest became history.
Bernanke's latest adds to our conviction that the Fed was trashed by financial markets, not the other way around.
Needless to say but it has inspired inflationists around the world. They needed a pep talk.
A couple of weeks ago we noted that on the bottom for precious metals the turn could be assisted by gold stocks beginning to outperform bullion. Also silver would begin to outperform gold. Both measures reached their worst on June 25th and popped up last week, and today's rise is contributing to the turn up.
Gold relative to commodities is working on a similarly constructive pattern.
A little more work will be needed to accomplish the definitive bottom, but we do see some "Green Shoots".
On the bigger picture, this is ending action on a cyclically depressed sector.
The rise in lower-grade bonds and beat up stock sectors is just a continuation of the rebound from a very oversold mini-panic.
The rally in orthodox investments is ending action on a cyclical bull.
We would continue to add to precious metals on weakness and to sell orthodoxy on the rallies.
Stock Market/Long Treasuries
- Stocks have been outperforming bonds.
- In June 2007 the Weekly RSI reached 74.
- Now it is at 72.
- The ratio itself is at an important resistance level.
- A rotation is pending, whereby treasuries could outperform stocks.
- It is uncertain how long this would last.
- Let's look at it as an opportunity for nimble traders.
M2 Velocity
- Economists define Velocity as the rate of turnover of money/credit relative to the economy.
- Problem is that interventionist economists don't fully understand it.
- Even with the discipline of a gold standard, markets can become wildly speculative. Velocity soars. And soaring prices will always become leveraged and at the climax the mania will have created all the credit that was needed. And on the great bubble more credit is created than the economy can possibly service.
- There is no need for arbitrary credit expansion by central banks.
- Speculation exhausts, prices turn down and Mister Margin overwhelms the ability of even undisciplined central banks' ability to keep the boom going.
- Velocity turns down.
- There is nothing that disciplined or even undisciplined central banks can do about it.
- Pity.
The following quotes are by leading interventionist economists during the Weimar Inflation. They also had a problem understanding velocity, or as it was called then "circulation".
"In proportion to the need, less money circulates in Germany now than before the war."
- Prof. Julius Wolfe, Summer, 1922
"However enormous may be the apparent rise in the circulation in 1922, actually the figures show a decline."
- Prof. Karl Elster, 1923
Peak Oil!
- In the political mania of the 1860s Stanley Jevons had a revelation that the civilized world was about to run out of coal.
- The "Oil Drum" has been a website dedicated to the promotion of "Peak Oil".
- The site is "closing up shop".
Link to July 12, 2013 'Bob and Phil Show' on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2013/07/bernanke-backtracks-bullion-beaten-back
