The following is part of Pivotal Events that was published for our subscribers June 12, 2014.
Signs Of The Times
"Issuance of US payment-in-kind notes is the greatest since 2007."
- Financial Times, June 3
"If the insatiable demand for bonds has up-ended the models you use to value them, you are not alone."
- Bloomberg, June 5
"The business of bundling junk-rated corporate loans into top-rated securities is booming like never before."
- Bloomberg, June 6
"US non-farm, non-financial corporate liquid assets, corporate America's mountain of cash just shrank by a huge amount."
- Bloomberg, June 6
Where did the liquidity go?
"The NFIB's small business confidence came in at 96.6 for May, the best since 2007."
- Bloomberg, June 10
The headlines keep recording, well, "insatiable demand for bonds" and "bundling". This is the most "over-the-top" action since the 2007 Bubble. With only the assurance that hindsight can provide, it all makes sense.
A crash is a crash and that concluded in March 2009. That the boom has run for five years also, in retrospect, makes sense. That the Fed has kept the "peddle to the metal" also makes sense. The Fed could not quit doing what it was designed to do in 1913, which has been to provide a "flexible" currency.
This prompts the enduring question - Why have there been so many credit contractions and business recessions? Not to overlook the two Classic Bubbles and two Classic Crashes. And while we are listing the critical events, there has been two Post-Bubble Recoveries. The last one ended at five years in 1937 and this one is becoming mature. Especially the speculative frenzy in the credit markets, which is very mature.
The point to be made is that all of the recessions as well as the major financial collapses were not prevented. Mister Margin and Mother Nature have overwhelmed the Fed's dedication to keep a boom going - every time.
The US dollar continues to improve its technical position.
Last week we thought that on the gain to 80.7 the DX action could briefly pause. It declined to 80.2, finding support at the 200-Day ma. This week it has made it to 80.9, a new high for the move.
The next key level is at 81.5; the high set in November and January.
This seems likely. The uptrend in the DX would be part of the discovery of the next credit crisis.
Once again the Canadian dollar corrected to support at the 50-Day ma, which was last week at 91.24. The high of 91.5 set in early May offers resistance, as does the 200-Day at 93.
Our theme has been that the C$ would recover out of December with firming commodity and gold prices. The other positive was that Quebec's implied constitutional crisis would not happen. The other side of this was that the US was going into a severe constitutional crisis.
Sadly, the latter is indeed becoming serious. The success of terrorist forces in Iraq was the objective of Obama's decision to pull so many troops out of that beleaguered country.
Also the White House is behind the "sudden" movement of young people swarming the Mexico-US border. This is part of Saul Alynsky's "Rules" to destroy the middle classes by overwhelming the welfare system.
American authoritarians still feel they need to act through the electoral system and they have been importing "voters" at a destabilizing pace.
For a couple of decades this page has observed that the only force on this planet that can defeat the US military in the field has been the Democrat Party.
As inspired by President Obama - it is happening.
The endless rally in lower-grade bond prices has helped the stock market immensely. For the past few weeks we have been "pounding the table" on the technical excesses recorded in junk and European bond markets.
Generally, prices reached their best last week and the action has paused.
This is within the season when fabulously good bond rallies have failed.
The Treasury Bond future reached 139 against our target (back in January) of 136 to 138. As noted, this did not become overbought on the Weekly, but it did on the Daily. Also sentiment reached levels only seen at important tops.
The advice was to shorten term in treasuries and to lighten up in the low-grade stuff.
The collapse of the attempt to establish responsible government in Iraq has rallied oil prices.
The last low was at 101.60 last week, which was also the level of the 50-Day ma. This week's bounce from support to 106 could be changing the picture.
If the 106 level holds it could reach 112, which was the high reached with last summer's Middle East crisis du jour.
Most commodities remain vulnerable to the firming dollar and pending credit concerns.
Another Train Wreck?
Very important turns in the financial markets have been anticipated by the behaviour of gold's real price. Our proxy has been our Gold/IA Commodities Index.
When it turns up it anticipates the end of a boom by a number of weeks. The last reversal was on May 21st, 2007 and the "Train Wreck" was discovered in early June of that fateful year.
In between the Index turned down on February 20th, some three weeks before the panic ended in early March.
It is nice to have an indicator that works at either extreme of boom or bust in the financial markets.
This time around, the Index turned up on June 2nd, suggesting speculative furies could become terminally exhausted by the end of this month. The chart follows.
It has been fascinating that despite all, including the desperate, interventions the real price of gold has had consistent behaviour. Down in a boom or bubble and up in the bust. This has worked over hundreds of years of financial history.
Within this is the behaviour of the gold/silver ratio, which goes down with the booms and up with the contractions. It's been doing it for centuries.
As we have been reviewing, on the "old" paradigm silver outperforms gold as both rally together. At important highs such as in 2011 and in 2012 momentum on the silver/gold ratio provided the "danger" signal.
In the "new" paradigm it has been likely that gold would outperform silver.
On the nearer-term chart this would show up when the gold/silver ratio increases above the last high of 68 set earlier this year.
That high became overbought and with this week's concerns about Iraq, the ratio has declined to 65. At 34 on the Daily RSI now, at 30 it would be oversold enough to end the decline.
Our May 29th Pivot noted that gold was poised for a rally and this seems to be working out. The low was 1240 set at the first of the month.
We are definitely bullish on gold's real price and our Index has turned up. At some point the rise will begin the enhance profitability of the gold industry.
Gold and silver stocks will be vulnerable to the pending liquidity crisis.
Last Hours On Everest: The Gripping Story of Mallory & Irvine's Fatal Ascent, by Graham Hoyland.
On the 1924 Everest expedition:
"The Tibetan coinage had been changed from silver to copper as a result of the practice of 'clipping' (removing small shavings of the precious metal), and so ten mules had to be taken, laden with 75,000 copper coins, the money for the expenses of the expedition.
In 1922 they had only needed three silver-carrying mules."
Volatility And The Stock Market
- A magnificent complacency has dropped volatility to its lowest in years.
- The Weekly "9-13-9" signal is a strong form of the Sequential Buy Pattern.
- The one in May 2008 was very timely and this one was clocked on May 30.
- It means volatility up as complacency gets trashed.
Gold/IA Commodity Index
- We ran this in the May 29th Pivot.
- When this reverses it has led important reversals in the financial markets by a number of weeks.
- The low was set on June 2nd and technically the reversal has been accomplished.
- In which case, this financial mania would likely roll over by the end of this month.
- The last reversal was on February 20, 2009, to the downside and the panic ended on March 9.
- Before that the reversal was on May 23rd, 2007 to the upside and the credit "Train Wreck" started on June 9th.
Link to June 14 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2014/06/this-week-in-money-140/