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The Tattoo Machine

The following is part of Pivotal Events that was published for our subscribers July 17, 2014.


Signs Of The Times

"Global sales of corporate bonds maturing in 50 years have jumped to record levels."

- Financial Times, June 27

"In Spain, where there was a debt crisis just two years ago, investors are so eager to buy the government's bonds that they have recently accepted the lowest interest rate since 1789."

- The New York Times, July 7

"To gauge just how comfortable the world of debt has gotten, consider: Bond buyers handed $2 billion last month to Ecuador, whose socialist president forced a default while calling creditors 'true monsters'."

- Bloomberg, July 8

"The percentage of stocks that have been borrowed by short sellers...has dropped to the lowest level since before the collapse of Lehman Bros."

- Financial Times, July 9

"Companies world-wide are selling stocks at a record pace."

- Wall Street Journal, July 10

"Deals packaging junk-rated corporate loans into securities with ratings as high as AAA are being done at a record pace."

- Bloomberg, July 10


Oh yeah and there is a lot of perspective out there!

This is stated anecdotally with the growing list of headlines recording reckless financial and policy behaviour. This is being accompanied by technical measures of the action in stock and bonds that confirm compulsive behaviour by investors and central bankers.

And as the saying goes, "The tattoo machine does not have an eraser". So both the technical and anecdotal sides are indelibly recorded.

And what we are seeing is "ending action", which will be reviewed in our usual sections.

All players should be working to make sure they are on the right side of posterity on the developing contraction.

The quip in our shop yesterday morning was that the bond future, crude oil, most other commodities and precious metals get to trade from "overbought" to "oversold", and back. Junk bonds and the S&P get to go from "overbought" to "overbought".

The latter is outstanding and is becoming very precarious.

As individuals, some central bankers have been uttering cautionary statements and could be showing their concerns about personally being on the right side of financial history. However, the reversal, as in previous examples, won't be due to a material change in Fed policy. The "taper" is in the market and we don't consider it or the buying program to be instrumental in any market change. It has added to the confidence of the leveraged crowd, which behaviour will time the reversal. The Fed won't trigger the reversal but once the credit markets start to change there will be FedSpeak about increasing rates. This will be an attempt to look in charge of the markets.

Interest Rates

As the mania for risk fades, the bond future continues its rally. The low was 134.85 set early in the month and it has made it to 138.25 today. There is some resistance at this level. However, the action is not overbought and around 140 seems possible.

Going the other way, JNK set its high at 41.62 on July 24th and has declined to 41.15 earlier today. This has had a pause so near-term support has been taken out. Also taken out is the 50-Day ma that has provided support a couple of times this year.

Taking out the 40-Week, which is around 40.25 would signal serious trouble in global credit markets.


The low in the DX with the financial party cycle was set at 78.93 in early May. Of importance is that this week's rise has broken above both the 50-Day and 200-Day moving averages. At 80.6 now, rising through resistance at 80.9 would be a significant breakout.

This would also signal a step towards the next contraction.

The anti-Fed crowd which includes gold and silver bugs still believes that with the full catastrophe, the dollar will crash to zero. History suggests otherwise. A catastrophe of any dimension will be highly inflated assets going down as the dollar heads up.

Last week we changed our positive on the Canadian dollar to negative. Friday accomplished a big reversal from 94.10 to 93.3. At 93 now, both 50-Day and 200-Day moving averages are at 92.6. Taking that out would suggest a decline to support at 91.

Precious Metals

"[The] 1901 [bull market] was ... speculative demonstration based ... on the assumption that we were living in a new era; that the old rules and principles and precedent of finance were obsolete; that things could safely be done today which had been dangerous or impossible in the past. The illusion seized on the public mind in 1901 quite as firmly as it did in 1929. It differed only in the fact that there were no college professors in 1901 who preached the popular illusion as their new political economy.''

- Alexander Dana Noyes, 1930

In the 1920s, Noyes was the pre-eminent financial journalist in America and his backward look on the 1929 Bubble is a classic. It is doubtful that he could imagine anything as reckless as a non-banker running the Fed, let alone a college professor. Mister Noyes, wherever you are, please meet Professor Bernanke.

Our case has been that the precious metals sector is completing the bottom of a cyclical bear market that followed the measurable blow-off of 2011.

The ChartWorks has had a series of pieces outlining the building of an important bottom in gold's price. This is within the "model" of a post-bubble collapse pattern such as followed 1929, or the Nikkei in 1989, etc.

The latest was yesterday and it noted that rising above 1326 would mark the breakout. Today's New York high was 1325.

However, the rally in both gold and silver is on exceptional developments in Gaza and with the shooting down of a commercial airliner over Ukraine.

Silver outperformed gold and this may not last too long. The real reason for a significant advance in gold would be the advent of another cyclical credit contraction. This could soon be discovered and we should watch for another momentum high in the silver/gold ratio.

On the silver stocks, SLW declined from 27.66 to 25.53 on Tuesday. A test of the high was required and so far it has popped to 26.78.

It is interesting that gold has outperformed the CRB today which will advance our GCI.

We will stay with our theme that gold, in real terms, will continue to act contra-cyclical to orthodox markets. This is presenting a cyclical opportunity to buy the gold stocks.

Today is not that opportunity, as the big stock market is getting close to rolling over. Spreading liquidity pressures could put a lid on gold stocks and could even drive them down.

The invasion of Gaza will soon be completed.

Credit Markets And The S&P

HYG Chart

  • The Rising Wedge pattern records an increasing urge to get into the play.
  • In the examples shown, the break below the lower trend line was followed by a significant setback.
  • This was associated with tradable declines in the stock market.
  • HYG broke below the line at the first of the month.

Gold's Real Price: Changes In Financial Markets

Gold and Commodities Chart
Larger Image

  • We use our Gold/Commodities Index (GCI) as a proxy for gold's real price.
  • The index was established to avoid having gold above and below the divisor.
  • Besides that gold is not a commodity.
  • Major reversals in the GCI have anticipated major changes in the financial markets.
  • The turn up on June 21, 2007 was associated with the reversal in credit spreads and the yield curve.
  • This integrated change was behind our observation that "The greatest train wreck in the history of credit" had started.
  • The turn down on February 20, 2009, nicely led the end of the financial panic on March 9.
  • As we have been noting, the turn up on June 2nd would likely lead the end of the financial party by around four weeks.
  • JNK and HYG seem to be failing.
  • Today the HYG/TLT has taken out the May low. Credit spreads are widening.


Link to July 18 Bob Hoye interview on TalkDigitalNetwork.com: http://talkdigitalnetwork.com/2014/07/chinese-corruption-threatening-world-markets


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